INTERNATIONAL FINANCE

BY

HARTLEY WITHERS

_BY THE SAME AUTHOR_. 

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INTERNATIONAL FINANCE

BY

HARTLEY WITHERS

 "While man cannot live by bread alone. He cannot go on living, even a good life if he really falls short of bread. "

PROF. J. L. MYERS. 

 _First Edition_ _May_, 1916. _Reprinted_ _June_, 1918. 

PREFACE

Responsibility for the appearance of this book--but not for itscontents--lies with the Council for the Study of InternationalRelations, which asked me to write one "explaining what the City reallydoes, why it is the centre of the world's Money Market, " etc. In tryingto do so, I had to go over a good deal of ground that I had covered inearlier efforts to throw light on the machinery of money and the StockExchange; and the task was done amid many distractions, for whichreaders must make as kindly allowance as they can. 

 HARTLEY WITHERS. 

 6, LINDEN GARDENS, W. _March_, 1916. 

CONTENTS

CHAPTER I

CAPITAL AND ITS REWARD

Finance the machinery of money-dealing--Lenders and borrowers--Capitaland its claim to reward--Stored-up work--Inherited wealth--The reward ofservices--Questionable services--Charles the Second's dukedoms--Modernequivalents--Workers and Savers

CHAPTER II

BANKING MACHINERY

Money at a bank--Bills of exchange--Finance and industry--Supremacy ofbill on London--London's freedom--The Bank of England--The great jointstock banks--The discount market--Bills and trade

CHAPTER III

INVESTMENTS AND SECURITIES

Stock Exchange securities--Government and municipal loans--Machinery ofloan issue--Underwriting--The Prospectus--Sinking fund--Bonds andcoupons--Registered stocks--Companies' securities--Stock Exchangedealings

CHAPTER IV

FINANCE AND TRADE

Why money goes abroad--Trade before finance--Prejudice in favour of homeinvestments--Prejudice against them--The reaction--Mexico andBrazil--Neutral moneylenders and the war--Goods and services lent andborrowed--The trade balance

CHAPTER V

THE BENEFITS OF INTERNATIONAL FINANCE

International finance and trade--Opening up the world--Exchange ofproducts--Finance as peacemaker--Popular delusions concerningfinanciers--Financiers and the present war--The cases of Egypt and theTransvaal--Diplomacy and finance

CHAPTER VI

THE EVILS OF INTERNATIONAL FINANCE

Anti-Semitic prejudice--The story of the Honduras loans--The problem tobe faced by issuing houses--Their moral obligations, responsibilities, and difficulties--Bad finance and big profits--The public'sresponsibility

CHAPTER VII

NATIONALISM AND FINANCE

Dangers of over-specialization--Analogy between State andindividual--Versatility of the savage--Specialization andpeace--Specialization and war--Should the export of capital beregulated?

CHAPTER VIII

REMEDIES AND REGULATIONS

Regulation of issues by Stock Exchange Committee--Danger arisingtherefrom--Difficulty of controlling capital--Best remedy is keenerappreciation by issuing houses, borrowers, and investors of evils of badfinance--Candour in prospectuses--War as financial schoolmaster--War asdestroyer of capital--War as stimulator of productive activity

INDEX

INTERNATIONAL FINANCE

CHAPTER I

CAPITAL AND ITS REWARD

Finance, in the sense in which it will be used in this book, means themachinery of money dealing. That is, the machinery by which money whichyou and I save is put together and lent out to people who want to borrowit. Finance becomes international when our money is lent to borrowers inother countries, or when people in England, who want to start anenterprise, get some or all of the money that they need, in order to doso, from lenders oversea. The biggest borrowers of money, in mostcountries, are the Governments, and so international finance is largelyconcerned with lending by the citizens of one country to the Governmentsof others, for the purpose of developing their wealth, buildingrailways and harbours or otherwise increasing their power to produce. 

Money thus saved and lent is capital. So finance is the machinery thathandles capital, collects it from those who save it and lends it tothose who want to use it and will pay a price for the loan of it. Thisprice is called the rate of interest, or profit. The borrower offersthis price because he hopes to be able, after paying it, to benefithimself out of what he is going to make or grow or get with its help, orif it is a Government because it hopes to improve the country's wealthby its use. Sometimes borrowers want money because they have beenspending more than they have been getting, and try to tide over adifficulty by paying one set of creditors with the help of another, instead of cutting down their spending. This path, if followed farenough, leads to bankruptcy for the borrower and loss to the lender. 

If no price were offered for capital, we should none of us save, or ifwe saved we should not risk our money by lending it, but hide it in ahole, or lock it up in a strong room, and so there could be no newindustry. 

Since capital thus seems to be the subject-matter of finance and it isthe object of this book to make plain what finance does, and how, itwill be better to begin with clear understanding of the function ofcapital. All the more because capital is nowadays the object of a gooddeal of abuse, which it only deserves when it is misused. When it ismisused, let us abuse it as heartily as we like, and take any possiblemeasures to punish it. But let us recognize that capital, when well andfairly used, is far from being a sinister and suspicious weapon in thehands of those who have somehow managed to seize it; but is in fact sonecessary to all kinds of industry, that those who have amassed it, andplaced it at the disposal of industry render a service to societywithout which society could not be kept alive. 

For capital, as has been said, is money saved and lent to, or employedin, industry. By being lent to, or employed in, industry it earns itsrate of interest or profit. There are nowadays many wise and earnestpeople who think that this interest or profit taken by capital is notearned at all but is wrung out of the workers by a process of extortion. If this view is correct then all finance, international and other, isorganized robbery, and instead of writing and reading books about it, weought to be putting financiers into prison and making a bonfire of theirbonds and shares and stock certificates. But, with all deference tothose who hold this view, it is based on a complete misapprehension ofthe nature and origin of capital. 

Capital has been described above as money put to certain purposes. Thiswas done for the sake of clearness and because this definition fits inwith the facts as they usually happen in these days. Economists definecapital as wealth reserved for production, and we must always rememberthat money is only a claim for, or a right to, a certain amount of goodsor a certain amount of other people's work. Money is only a title towealth, because if I have a sovereign or a one-pound note in my pocket, I thereby have the power of buying a pound's worth of goods or ofhiring a doctor to cure me or a parson to bury me or anybody else to doanything that I want, up to the buying power of that sovereign. This isthe power that money carries with it. When the owner of this power, instead of exercising it in providing himself with luxuries oramusements, uses it by lending it to someone who wants to build afactory, and employ workers, then, because the owner of the moneyreceives his rate of interest he is said to be exploiting labour, because, so it is alleged, the workers work and he, the capitalist, sitsin idleness and lives on their labour. 

And so, in fact, he does. But we have not yet found out how he got themoney that he lent. That money can only have been got by work done orservices rendered, for which other people were ready to pay. Capital, looked at from this point of view, is simply stored up work, andentitled to its reward just as much as the work done yesterday. Thecapitalist lives on the work of others, but he can only do so because hehas wrought himself in days gone by or because someone else has wroughtand handed on to him the fruits of his labour. Let us take the case ofa shopkeeper who has saved a hundred pounds. This is his pay for workdone and risk taken (that the goods which he buys may not appeal to hiscustomers) during the years in which he has saved it. He might spend hishundred pounds on a motor cycle and a side-car, or on furniture, or apiano, and nobody would deny his right to do so. On the contrary hewould probably be applauded for giving employment to makers of thearticles that he bought. Instead of thus consuming the fruit of his workon his own amusement, and the embellishment of his home, he prefers tomake provision for his old age. He invests his hundred pounds in the 5per cent. Debenture stock of a company being formed to extend a bootfactory. Thereby he gives employment to the people who build theextension and provide the machinery, and thereafter to the men and womenwho work in the factory, and moreover he is helping to supply otherpeople with boots. He sets people to work to supply other people's wantsinstead of his own, and he receives as the price, of his service fivepounds a year. But it is his work, that he did in the years in which hewas saving, that is earning him this reward. 

An interesting book has lately appeared in America, called "Income, " inwhich the writer, Dr. Scott Nearing, of the University of Pennsylvania, draws a very sharp distinction between service income and propertyincome, implying, if I read him aright, that property income is anunjust extortion. This is how he states his case:--[1]

 "The individual whose effort creates values for which society pays receives service income. His reward is a reward for his personality, his time, his strength. Railroad president and roadmender devote themselves to activities which satisfy the wants of their fellows. Their service is direct. In return for their hours of time and their calories of energy, they receive a share of the product which they have helped to produce. 

 "The individual who receives a return because of his property ownership, receives a property income. This man has a title deed to a piece of unimproved land lying in the centre of a newly developing town. A storekeeper offers him a thousand dollars a year for the privilege of placing a store on the land. The owner of the land need make no exertion. He simply holds his title. Here a man has labored for twenty years and saved ten thousand dollars by denying himself the necessaries of life. He invests the money in railroad bonds, and someone insists he thereby serves society. In one sense he does serve. In another, and a larger sense, he expects the products of his past service (the twenty years of labor), to yield him an income. From the day when he makes his investment he need never lift a finger to serve his fellows. Because he has the investment, he has income. The same would hold true if the ten thousand dollars had been left him by his father or given to him by his uncle.... The fact of possession is sufficient to yield him an income. "

Now, in all these cases of property income which Dr. Nearing seems toregard as examples of income received in return for no effort, theremust have been an effort once, on the part of somebody, which put themaker of it in possession of the property which now yields an income tohimself, or those to whom he has left or given it. First there is thecase of the man who has a title deed to a piece of land. How did he getit? Either he was a pioneer who came and cleared it and settled on it, or he had worked and saved and with the product of his work had boughtthis piece of land, or he had inherited it from the man who had clearedor bought the land. The ownership of the land implies work and savingand so is entitled to its reward. Then there is the case of the man whohas saved ten thousand dollars by labouring for twenty years and denyinghimself the necessaries of life. Dr. Nearing admits that this man hasworked in order to get his dollars; he even goes so far as to add thathe had denied himself the necessaries of life in order to save. Incidentally one may wonder how a man who has denied himself thenecessaries of life for twenty years can be alive at the end of them. This man has worked for his dollars, and, instead of spending them onimmediate enjoyment, lends them to people who are building a railway, and so is quickening and cheapening intercourse and trade. Dr. Nearingseems to admit grudgingly that in a sense he thereby renders a service, but he complains because his imaginary investor expects without furtherexertion to get an income from the product of his past service. If hecould not get an income from it, why should he save? And if he andmillions of others did not save how could railways or factories bebuilt? And if there were no railways or factories how could workers findemployment?

If every capitalist only got income from the product of his own work inthe past, which he had spent, as in this case, on developing industry, his claim to a return on it would hardly need stating. He would havesaved his ten thousand dollars or two thousand pounds, and instead ofspending it on two thousand pounds' worth of amusement or pleasure forhimself he would have preferred to put it at the disposal of those whoare in need of capital for industry and promise to pay him 5 per cent. Or £100 a year for the use of it. By so doing he increases the demandfor labour, not momentarily as he would have done if he had spent hismoney on goods and services immediately consumed, but for all time, aslong as the railway that he helps to build is running and earning anincome by rendering services. He is a benefactor to humanity as long ashis capital is invested in a really useful enterprise, and especially tothe workers who cannot get work unless the organizers of industry aresupplied with plenty of cheap capital. In fact, the more plentiful andcheap is capital, the keener will be the demand for the labour of theworkers. 

But when Dr. Nearing points out that the income of the ten thousanddollars would be equally secure if the owner of them had them left himby his father or given him by his uncle, then at last he smites capitalon a weak point in its armour. There, is, without question, much to besaid for the view that it is unfair that a man who has worked and savedshould thereby be able to hand over to his son or nephew, who has neverworked or saved, this right to an income which is derived from work doneby somebody else. It seems unfair to all of us, who were not blessedwith equally industrious and provident fathers and uncles, and it isoften bad for the man who gets the income as a reward for no effort ofhis own, because it gives him a false start in life and sometimes tendsto make him a futile waster, who can only justify his existence and hiscommand over other people's work, by pointing to the efforts of hisdeceased sire or uncle. Further, unless he is very lucky, he is likelyto grow up with the notion that, just because he has been left or givena certain income, he is somehow a superior person, and that it is partof the scheme of the universe that others should work for his benefit, and that any attempt on the part of other people to get a larger share, at his expense, of the good things of the earth is an attempt atrobbery. He is, by being born to a competence, out of touch with the lawof nature, which says that all living things must work for their living, or die, and his whole point of view is likely to be warped and narrowedby his unfortunate good fortune. 

These evils that spring from hereditary property are obvious. But it maybe questioned whether they outweigh the advantages that arise from it. The desire to possess is a strong stimulus to activity in production, because possession is the mark of success in it, and all healthy-mindedmen like to feel that they have succeeded; and almost equally strong isthe desire to hand on to children or heirs the possessions that theworker's energy has got for him. In fact it may almost be said that inmost men's minds the motive of possession implies that of being able tohand on; they would not feel that they owned property which they werebound to surrender to the State at their deaths. If and when society isever so organized that it can produce what it needs without spurring thecitizen to work with the inducement supplied by possession, and thepower to hand on property, then it may be possible to abolish theinequities that hereditary property carries with it. As things are atpresent arranged it seems that we are bound to put up with them if thecommunity is to be fed and kept alive. At least we can console ourselveswith the thought that property does not come into existence by magic. Except in the case of the owners of land who may be enriched without anyeffort by the discovery of minerals or by the growth of a city, capitalcan only have been created by services rendered; and even in the case ofowners of land, they, and those from whom they derived it, must havedone something in order to get the land. 

It is, of course, quite possible that the something which was done was aservice which would not now be looked on as meriting reward. In themedieval days mailclad robbers used to get (quite honestly and rightlyaccording to the notions then current) large grants of land because theyhad ridden by the side of their feudal chiefs when they went onmarauding forays. In later times, as in the days of our Merry Monarch, attractive ladies were able to found ducal families by placing theircharms at the service of a royal debauchee. But the rewards of thefreebooters have in almost all cases long ago passed into the hands ofthose who purchased them with the proceeds of effort with some approachto economic justification; and though some of Charles the Second'sdukedoms are still extant, it will hardly be contended that it ispossible to trace the origin of everybody's property and confiscate anythat cannot show a reasonable title, granted for some true economicservice. 

What we can do, and ought to do, if economic progress is to move alongright lines, is to try to make sure that we are not, in these days ofalleged enlightenment, committing out of mere stupidity andthoughtlessness, the crime which Charles the Second perpetrated for hisown amusement. He gave large tracts of England to his mistresses becausethey pleased his roving fancy. Now the power to dispense wealth haspassed into the hands of the people, who buy the goods and servicesproduced, and so decide what goods and services will find a market, andso will enrich their producers. Are we making much better use of it? Onthe whole, much better; but we still make far too many mistakes. Thepeople to whom nowadays we give big fortunes, though they include alarge number of organizers of useful industry, also number within theirranks a crowd of hangers on such as bookmakers, sharepushers, andvendors of patent pills or bad stuff to read. These folk, and others, live on our vices and stupidities, and it is our fault that they can doso. Because a large section of the public likes to gamble away its moneyon the Stock Exchange, substantial fortunes have been founded by thosewho have provided the public with this means of amusement. Because thepublic likes to be persuaded by the clamour of cheapjack advertisementthat its inside wants certain medicines, and that these medicines areworth buying at a price that makes the vendor a millionaire, there he iswith his million. Some people say that he has swindled the public. Thepublic has swindled itself by allowing him to foist stuff down itsthroat on terms which give him, and his heirs and assigns after him, allthe control over the work and wealth of the world that is implied by thepossession of a million. When we buy rubbish we do not only waste ourmoney to our own harm, but, under the conditions of modern society, weput the sellers of rubbish in command of the world, as far as the moneypower commands it, which is a good deal further than is pleasing. 

Hence it is that when some of those who question the right of capital toits reward, do so on the ground that capital is often acquired byquestionable means, they are barking up the wrong tree. Capital can onlybe acquired by selling something to you and me. If you and I had moresense in the matter of what we buy, capital could not be acquired byquestionable means. By our greed and wastefulness we give fortunes tobookmakers, market-riggers and money-lenders. By our preference for"brilliant" investments, with a high rate of interest and bad security, we invite the floating of rotten companies and waterlogged loans. By ourreadiness to be deafened by the clamour of the advertiser into buyingthings that we do not want, we hand industry over to the hands of theloudest shouter, and by our half-educated laziness in our selection ofwhat we read and of the entertainments that we frequent, we open the wayto opulence through the debauching of our taste and opinions. It is ourfault and ours only. As soon as we have learnt and resolved to buy andenjoy only what is worth having, the sellers of rubbish may put up theirshutters and burn their wares. 

Capital, then, is stored up work, work that has been paid for bysociety. Those who did the work and took its reward, turned the proceedsof it into making something more instead of into pleasure andgratification for themselves. By a striking metaphor capital is oftendescribed as the seed corn of industry. Seed corn is the grain that thefarmer, instead of making it into bread for his own table, or sellingit to turn it into picture-palace tickets, or beer, or other forms ofshort-lived comfort, keeps to sow in the earth so that he may reap hisharvest next year. If the whole world's crop were eaten, there would beno seed corn and no harvest. So it is with industry. If its wholeproduct were turned into goods for immediate consumption, there could beno further development of industry, and no maintenance of its existingplant, which would soon wear out and perish. The man who spends lessthan he earns and puts his margin into industry, keeps industry alive. 

From the point of view of the worker--by whom I mean the man who haslittle or no capital of his own, and has only, or chiefly, his skill, ofhead or of hand, to earn his living with--those who are prepared to saveand put capital at the disposal of industry ought to be given everypossible encouragement to do so. For since capital is essential toindustry, all those who want to earn a living in the workshops or in thecountinghouse, or in the manager's office, will most of all, if they arewell advised, want to see as much capital saved as possible. The morethere is of it, the more demand there will be for the brains and musclesof the workers, and the better the bargain these latter will be able tomake for the use of their brains and muscles. If capital is so scarceand timid that it can only be tempted by the offer of high rates for itsuse, organizers of industry will think twice about expanding works oropening new ones, and there will be a check to the demand for workers. If so many people are saving that capital is a drug in the market, anyone who has an enterprise in his head will put it in hand, andworkers will be wanted, first for construction then for operation. 

It is to the interest of workers that there should be as manycapitalists as possible offering as much capital as possible toindustry, so that industry shall be in a state of chronic glut ofcapital and scarcity of workers. Roughly, it is true that the product ofindustry is divided between the workers who carry it on, and the saverswho, out of the product of past work, have built the workshop, put inthe plant and advanced the money to pay the workers until the newproduct is marketed. The workers and the savers are at once partners andrivals. They are partners because one cannot do without the other;rivals because they compete continually concerning their share of theprofit realized. If the workers are to succeed in this competition andsecure for themselves an ever-increasing share of the profit ofindustry--and from the point of view of humanity, civilization, nationality, and common sense it is most desirable that this should beso--then this is most likely to happen if the savers are so numerousthat they will be weak in bargaining and unable to stand out against thedemands of the workers. If there were innumerable millions of workersand only one saver with money enough to start one factory, the one saverwould be able to name his own terms in arranging his wages bill, and thesalaries of his managers and clerks. If the wind were on the othercheek, and a crowd of capitalists with countless millions of money wereeager to set the wheels of industry going, and could not find enoughworkers to man and organize and manage their workshops, then the workerswould have the whip hand. To bring this state of things about it wouldseem to be good policy not to damn the capitalist with bell and withbook and frighten him till he is so scarce that he is master of thesituation, but to give him every encouragement to save his money and putit into industry. For the more plentiful he is, the stronger is theposition of the workers. 

In fact the saver is so essential that it is nowadays fashionable tocontend that the saving business ought not to be left to the whims ofprivate individuals, but should be carried out by the State in thepublic interest; and there are some innocent folk who imagine that, ifthis were done, the fee that is now paid to the saver for the use of thecapital that he has saved, would somehow or other be avoided. In factthe Government would have to tax the community to produce the capitalrequired. Capital would be still, as before, the proceeds of work done. And the result would be that the taxpayers as a whole would have to payfor capital by providing it. This might be a more equitable arrangement, but as capital can only be produced by work, the taxpayers would haveto do a certain amount of work with the prospect of not being allowed tokeep the proceeds, but of being forced to hand it over to Government. Whether such a plan would be likely to be effective in keeping industrysupplied with capital is a question which need not be debated until thepossibility of such a system becomes a matter of practical politics. 

For our present purpose it is enough to have shown that the capital, which is the stock-in-trade of finance, is not a fraudulent claim totake toll of the product of industry, but an essential part of thefoundation on which industry is built. A man can only become acapitalist by rendering services for which he receives payment, andspending part of his pay not on his immediate enjoyment, but inestablishing industry either on his own account or through the agency ofsomeone else to whom be lends the necessary capital. Before any industrycan start there must be tools and a fund out of which the workers can bepaid until the work that they do begins to bring in its returns. Thefund to buy these tools and pay the workers can only be found out ofthe proceeds of work done or services rendered. Moreover, there isalways a risk to be run. As soon as the primitive savage left off makingeverything for himself and took to doing some special work, such asarrow making, in the hope that his skill, got from concentration on oneparticular employment, would be rewarded by the rest of the tribe whotook his arrows and gave him food and clothes in return, he began to runthe risk that his customers might not want his product, if they happenedto take to fishing for their food instead of shooting it. This risk isstill present with the organizers of industry and it falls first on thecapitalist. If an industry fails the workers cease to be employed by it;but as long as they work for it their wages are a first charge which hasto be paid before capital gets a penny of interest or profit, and if thefailure of the industry is complete the capital sunk in it will be gone. 

FOOTNOTES:

[Footnote 1: Pages 24, 25. ]

CHAPTER II

BANKING MACHINERY

Capital, then, is wealth invested in industry, finance is the machineryby which this process of investment is carried out, and internationalfinance is the machinery by which the wealth of one country is investedin another. 

Let us consider the case of a doctor in a provincial town who is makingan annual income of about £800 a year, living on £600 of it and saving£200. Instead of spending this quarter of his income on immediateenjoyments, such as wine and cigars, and journeys to London, he investsit in different parts of the world through the mechanism ofinternational finance, because he has been attracted by the advantagesof a system of investment which was fashionable some years ago, whichworked by what was called Geographical Distribution. [2] This meant tosay that the investors who practised it put their money into as manydifferent countries as possible, so that the risk of loss owing toclimatic or other disturbances might be spread as widely as possible. Sohere we have this quiet country doctor spreading all over the world themoney that he gets for dosing and poulticing and dieting his patients, stimulating industry in many climates and bringing some part of itsproceeds to be added to his store. Let us see how the process works. First of all he has a bank, into which he pays day by day the fees thathe receives in coin or notes and the cheques that he gets, each halfyear, from those of his patients who have an account with him. As longas his money is in the bank, the bank has the use of it, and not much ofit is likely to go abroad. For the banks use most of the fundsentrusted to them in investments in home securities, or in loans andadvances to home customers. Part of them they use in buying bills ofexchange drawn on London houses by merchants and financiers all over theworld, so that even when he pays money into his bank it is possible thatour doctor is already forming part of the machinery of internationalfinance and involving us in the need for an explanation of one of itsmysteries. 

A bill of exchange is an order to pay. When a merchant in Argentinasells wheat to an English buyer, he draws a bill on the buyer (or somebank or firm in England whom the buyer instructs him to draw on), saying, "Pay to me" (or anybody else whom he may name) "the sum of somany pounds. " This bill, if it is drawn on a firm or company of wellknown standing, the seller of the wheat can immediately dispose of, andso has got payment for his goods. Usually the bill is made payable twoor three, or sometimes six months after sight, that is after it has beenreceived by the firm on which it is drawn, and "accepted" by it, that issigned across the front to show that the firm drawn on will pay thebill when it falls due. These bills of exchange, when thus accepted, arepromises to pay entered into by firms of first-rate standing, and areheld as investments by English banks. Bills of exchange are also drawnon English houses to finance trade transactions between foreigncountries, and also as a means of borrowing money from England. Whenthey are drawn on behalf of English customers, the credit given is givenat home, but as it is (almost always) given in connection withinternational trade, the transaction may be considered as part ofinternational finance. When they are drawn on behalf of foreigncountries, trading with other foreigners, or using the credit to lend toother foreigners, the connection with international finance is obvious. They are readily taken all over the world, because all over the worldthere are people who have payments to make to England owing to the widedistribution of our trade, and it has long been England's boast thatbills of exchange drawn on London firms are the currency ofinternational commerce and finance. 

Some people tell us that this commanding position of the English billin the world's markets is in danger of being lost owing to the presentwar: in the first place because America is gaining wealth rapidly, whilewe are shooting away our savings, and also because the Germans will makeevery endeavour to free themselves from dependence on English credit forthe conduct of their trade. Certainly this danger is a real one, but itdoes not follow that we shall not be able to meet it and defeat it. Ifthe war teaches us to work hard and consume little, so that when peacecomes we shall have a great volume of goods to export, there is noreason why the bill on London should not retain much if not all of itsold prestige and supremacy in the marts of the world. For we must alwaysremember that finance is only the handmaid of industry. She is often apert handmaid who steals her mistress's clothes and tries to flauntbefore the world as the mistress, and so she sometimes imposes on manypeople who ought to know better, who think that finance is anall-powerful influence. Finance is a mighty influence, but it is a merepiece of machinery which assists, quickens, and lives on production. The men who make and grow things, and carry them from the place wherethey are made and grown to the place where they are wanted, these arethe men who furnish the raw material of finance, without which it wouldhave to shut up its shop. 

If they and their work ceased, we should all starve, and the financierswould have nothing behind the pieces of paper that they handle. Iffinance and the financiers were suddenly to cease, there would be a veryawkward jar and jolt in our commercial machinery, but as long as thestuff and the means of carrying it were available, we should very soonpatch up some other method for exchanging it between one nation andanother and one citizen and another. The supremacy of the London bill ofexchange was created only to a small extent by any supremacy in London'sfinancial machinery; it was based chiefly on the supremacy of England'sworld-wide trade, and on our readiness to take goods from all nations. The consequence of this was that traders of all nations sold goods tous, and so had claims on us and drew bills on us, and bought goods fromus, and so owed us money and wanted to buy bills drawn on us to paytheir debts with. So everywhere the bill on London was known andfamiliar and welcome. If the Americans are able and willing to developsuch a world-wide trade as ours, then the bill on New York will have avogue all over the world just as is enjoyed by the bill on London. ThenLondon and New York will have to fight the matter out by seeing whichwill provide the best and cheapest machinery for discounting the bill, that is, turning it into cash on arrival, so that the holder of it shallget the best possible price at the present moment, for a bill due two orthree months hence. 

In this matter of machinery London has certain advantages which ought, if well used and applied, to stand her in good stead in any strugglethat lies ahead of her. London's credit machinery has grown up in almostcomplete freedom from legislation, and it has consequently been able togrow, without let or hindrance, along the lines that expediency andconvenience have shown to be most practical and useful. It has been toobusy to be logical or theoretical, and consequently it is full ofabsurdities and anomalies, but it works with marvellous ease andelasticity. 

In its centre is the Bank of England, with the prestige of antiquity andof official dignity derived from acting as banker to the BritishGovernment, and with still more practical strength derived from actingas banker to all the other great banks, several of them much bigger, incertain respects, than it. The Bank of England is very severely andstrictly restricted by law in the matter of its note issue, but itluckily happened, when Parliament was imposing these restrictions on theBank's business, that note issuing was already becoming a comparativelyunimportant part of banking, owing to the development of the use ofcheques. Nowadays, when borrowers go to the Bank of England for loans, they do not want to take them out in notes; all they want is a credit inthe Bank's books against which they can draw cheques. A credit in theBank of England's books is regarded by the financial community as"cash, " and this pleasant fiction has given the Bank the power ofcreating cash by a stroke of its pen and to any extent that it pleases, subject only to its own view as to what is prudent and sound business. On p. 33 ("A BANK RETURN", below) is a specimen of a return that is published each weekby the Bank of England, showing its position in two separate accountswith regard to its note issuing business and its banking business: thereturn taken is an old one, published before the war, so as to show howthe machine worked in normal times before war's demands had blown outthe balloon of credit to many times its former size. 

If the commercial and financial community is short of cash, all that ithas to do is to go to the Bank of England and borrow a few millions, andthe only effect on the Bank's position is an addition of so manymillions to its holding of securities and a similar addition to itsdeposits. It may sometimes happen that the borrowers may require the useof actual currency, and in that case part of the advances made will betaken out in the form of notes and gold, but as a general rule the Bankis able to perform its function of providing emergency credit by merelymaking entries in its books. 

A BANK RETURN

ISSUE DEPARTMENT. 

Notes Issued £56, 908, 235 Government Debt £11, 015, 100 Other Securities 7, 434, 900 Gold Coin and Bullion 38, 458, 235 Silver Bullion --- ----------- ----------- £56, 908, 235 £56, 908, 235 ----------- -----------

BANKING DEPARTMENT. 

Proprietors' Capital £14, 553, 000 Government Securities £11, 005, 126Rest 3, 431, 484 Other Securities 33, 623, 288Public Deposits 13, 318, 714 Notes 27, 592, 980Other Deposits 42, 485, 605 Gold and Silver Coin 1, 596, 419Seven Day and other Bills 29, 010 ----------- ----------- £73, 817, 813 £73, 817, 813 ----------- -----------

With the Bank of England thus acting as a centre to the system, therehas grown up around it a circle of the great joint stock banks, whichprovide credit and currency for commerce and finance by lending moneyand taking it on deposit, or on current account. These banks work underpractically no legal restrictions of any kind with regard to the amountof cash that they hold, or the use that they make of the money that isentrusted to their keeping. They are not allowed, if they have an officein London, to issue notes at all, but in all other respects they areleft free to conduct their business along the lines that experience hasshown them to be most profitable to themselves, and most convenient fortheir customers. Being joint stock companies they have to publishperiodically, for the information of their shareholders, a balance sheetshowing their position. Before the war most of them published a monthlystatement of their position, but this habit has lately been given up. Nolegal regulations guide them in the form or extent of the informationthat they give in their balance sheets, and their great success andsolidity is a triumph of unfettered business freedom. This absence ofrestriction gives great elasticity and adaptability to the creditmachinery of London. Here is a specimen of one of their balance sheets, slightly simplified, and dating from the days before the war:--

LIABILITIES. 

Capital (subscribed) £14, 000, 000 ----------Paid up 3, 500, 000Reserve 4, 000, 000Deposits 87, 000, 000Circular Notes, etc. 3, 000, 000Acceptances 6, 000, 000Profit and loss 500, 000 ----------- £104, 000, 000 -----------

ASSETS

Cash in hand and at Bank of England £12, 500, 000Cash at call and short notice 13, 000, 000Bills discounted 19, 000, 000Govt. Securities 5, 000, 000Other Investments 4, 500, 000Advances and loans 42, 000, 000Liability of customers on account of Acceptances 6, 000, 000Promises 2, 000, 000 ----------- £104, 000, 000 -----------

On one side are the sums that the bank has received, in the shape ofcapital subscribed, from its shareholders, and in the shape of depositsfrom its customers, including Dr. Pillman and thousands like him; on theother the cash that it holds, in coin, notes and credit at the Bank ofEngland, its cash lent at call or short notice to bill brokers (of whommore anon) and the Stock Exchange, the bills of exchange that it holds, its investments in British Government and other stocks, and the big itemof loans and advances, through which it finances industry and commerceat home. It should be noted that the entry on the left side of thebalance sheet, "Acceptances, " refers to bills of exchange which the bankhas accepted for merchants and manufacturers who are importing goods andraw material, and have instructed the foreign exporters to draw bills ontheir bankers. As these merchants and manufacturers are responsible tothe bank for meeting the bills when they fall due, the acceptance itemis balanced by an exactly equivalent entry on the other side, showingthis liability of customers as an asset in the bank's favour. 

This business of acceptance is done not only by the great banks, butalso by a number of private firms with connections in foreign countries, and at home, through which they place their names and credit at thedisposal of people less eminent for wealth and position, who pay them acommission for the use of them. 

Other wheels in London's credit machinery are the London offices ofcolonial and foreign banks, and the bill brokers or discount houseswhich deal in bills of exchange and constitute the discount market. Thuswe see that there is in London a highly specialized and elaboratemachinery for making and dealing in these bills, which are the currencyof international trade. Let us recapitulate the history of the bill andsee the part contributed to its career by each wheel in the machine. Weimagined a bill drawn by an Argentine seller against a cargo of wheatshipped to an English merchant. The bill will be drawn on a Londonaccepting house, to whom the English merchant is liable for its duepayment. The Argentine merchant, having drawn the bill, sells it to theBuenos Ayres branch of a South American bank, formed with Englishcapital, and having its head office in London. It is shipped to London, to the head office of the South American bank, which presents it foracceptance to the accepting house on which it is drawn, and then sellsit to a bill broker at the market rate of discount. If the bill is duethree months after sight, and is for £2000, and the market rate ofdiscount is 4 per cent. For three months' bills, the present value ofthe bill is obviously £1980. The bill broker, either at once or later, probably sells the bill to a bank, which holds it as an investment untilits due date, by which time the importer having sold the wheat at aprofit, pays the money required to meet the bill to his banker and thetransaction is closed. Thus by means of the bill the exporter hasreceived immediate payment for his wheat, the importing merchant hasbeen supplied with credit for three months in which to bring home hisprofit, and the bank which bought the bill has provided itself with aninvestment such as bankers love, because it has to be met within a shortperiod by a house of first-rate standing. 

All this elaborate, but easily working machinery has grown up for theservice of commerce. It is true that bills of exchange are often drawnby moneylenders abroad on moneylenders in England merely in order toraise credit, that is to say, to borrow money by means of the Londondiscount market. Sometimes these credits are used for merely speculativepurposes, but in the great majority of cases they are wanted for thefurtherance of production in the borrowing country. The justification ofthe English accepting houses, and bill brokers, and banks (in so far asthey engage in this business), is the fact that they are assistingtrade, and could not live without trade, and that trade if deprived oftheir services would be gravely inconvenienced and could only resume itspresent activity by making a new machinery more or less on the samelines. The bill whose imaginary history has been traced, came into beingbecause the drawer had a claim on England through a trade transaction. He was able to sell it to the South American bank only because the bankknew that many other people in Argentina would have to make payments toEngland and would come to it and ask it for drafts on London, which, byremitting this bill to be sold in London, it would be able to supply. International finance is so often regarded as a machinery by which paperwealth is manufactured out of nothing, that it is very important toremember that all this paper wealth only acquires value by beingultimately based on something that is grown or made and wanted to keeppeople alive or comfortable, or at least happy in the belief that theyhave got something that they thought they wanted, or which habit orconvention obliged them to possess. 

FOOTNOTES:

[Footnote 2: All this imaginary picture is of events before the war. Atpresent Dr. Pillman, being a patriotic citizen, is saving much fasterthan before, and putting every pound that he can save into the hands ofthe British Government by subscribing to War Loans and buying Exchequerbonds. He is too old to go and do medical work at the front, so he doesthe next best thing by cutting down his expenses and finding money forthe war. ]

CHAPTER III

INVESTMENTS AND SECURITIES

So far we have only considered what happens to the money of those whosave as long as it is left in the hands of their bankers, and we haveseen that it is only likely to be employed internationally, if investedby bankers in bills of exchange which form a comparatively small part oftheir assets. It is true that bankers also invest money in securities, and that some of these are foreign, but here again the proportioninvested abroad is so small that we may be reasonably sure that anymoney left by us in the hands of our bankers will be employed at home. 

But in actual practice those who save do not pile up a large balance attheir banks. They keep what is called a current account, consisting ofamounts paid in in cash or in cheques on other banks or their own bank, and against this account they draw what is needed for their weekly andmonthly payments; sometimes, also, they keep a certain amount on depositaccount, that is an account on which they can only draw after giving aweek's notice or more. On their deposit account they receive interest, on their current account they may in some parts of the country receiveinterest on the average balance kept. But the deposit account is mostoften kept by people who have to have a reserve of cash quicklyavailable for business purposes. The ordinary private investor, when hehas got a balance at his bank big enough to make him feel comfortableabout being able to meet all probable outgoings, puts any money that hemay have to spare into some security dealt in on the Stock Exchange, andso securities and the Stock Exchange have to be described and examinednext. They are very much to the point, because it is through them thatinternational finance has done most of its work. 

Securities, then, are the stocks, shares and bonds which are given tothose who put money into companies, or into loans issued byGovernments, municipalities and other public bodies. Let us take theGovernments and public bodies first, because the securities issued bythem are in some ways simpler than those created by companies. 

When a Government wants to borrow, it does so because it needs money. The purpose for which it needs it may be to build a railway or canal, ormake a harbour, or carry out a land improvement or irrigation scheme, orotherwise work some enterprise by which the power of the country to growand make things may be increased. Enterprises of this kind are usuallycalled reproductive, and in many cases the actual return from them incash more than suffices to meet the interest on the debt raised to carrythem out, to say nothing of the direct benefit to the country inincreasing its output of wealth. In England the Government haspractically no debt that is represented by reproductive assets. OurGovernment has left the development of the country's resources toprivate enterprise, and the only assets from which it derives a revenueare the Post Office buildings, the Crown lands and some shares in theSuez Canal which were bought for a political purpose. Governments alsoborrow money because their revenue from taxes is less than the sums thatthey are spending. This happens most often and most markedly when theyare carrying on war, or when nations are engaged in a competition inarmaments, building navies or raising armies against one another so asto be ready for war if it happens. This kind of debt is calleddead-weight debt, because there is no direct or indirect increase, inconsequence of it, in the country's power to produce things that arewanted. This kind of borrowing is generally excused on the ground thatprovision for the national safety is a matter which concerns posterityquite as much as the present generation, and that it is, therefore, fairto leave posterity to pay part of the bill. 

Municipalities likewise borrow both for reproductive purposes and forobjects from which no direct revenue can be expected. They may investmoney lent them in gas or electric works or water supply or tramways, and get an income from them which will more than pay the interest onthe money borrowed. Or they may put it into public parks and recreationgrounds or municipal buildings, or improvements in sanitation, therebybeautifying and cleansing the town. If they do these things in such away as to make the town a pleasanter and healthier place to live in, they may indirectly increase their revenue; but if they do themextravagantly and badly, they run the risk of putting a burden on theratepayers that will make people shy of living within their borders. 

Whatever be the object for which the loan is issued, the procedure isthe same by which the money is raised. The Government or municipalityinvites subscriptions through a bank or through some great financialhouse, which publishes what is called a prospectus by circular, and inthe papers, giving the terms and details of the loan. People who havemoney to spare, or are able to borrow money from their bankers, and areattracted by the terms of the loan, sign an application form which isissued with the prospectus, and send a cheque for the sum, usually 5 percent. Of the amount that they apply for, which is payable onapplication. If the loan is over-subscribed, the applicants will onlyreceive part of the sums for which they apply. If it is not fullysubscribed, they will get all that they have asked for, and the balanceleft over will be taken up in most cases by a syndicate formed by thebank or firm that issued the loan, to "underwrite" it. Underwritingmeans guaranteeing the success of a loan, and those who do so receive acommission of anything from 1 to 3 per cent. ; if the loan is popular andgoes well the underwriters take their commission and are quit; if theloan is what the City genially describes as a "frost, " the underwritersmay find themselves saddled with the greater part of it, and will havethe pleasure of nursing it until such time as the investing public willtake it off their hands. Underwriting is thus a profitable business whentimes are good, and the public is feeding freely, but it can only beindulged in by folk with plenty of capital or credit, and so able tocarry large blocks of stock if they find themselves left with them. 

To take a practical example, let us suppose that the King of Ruritaniais informed by his Minister of Marine that a battleship must at once beadded to its fleet because his next door neighbour is thought to bethinking of making himself stronger on the water, while his Minister ofFinance protests that it is impossible, without the risk of serioustrouble, to add anything further to the burdens of the taxpayers. A loanis the easy and obvious way out. London and Paris between them will findtwo or three millions with pleasure. That will be enough for abattleship and something over in the way of new artillery for the armywhich can be ordered in France so as to secure the consent of the FrenchGovernment, which was wont to insist that a certain proportion of anyloan raised in Paris must be spent in the country. (It need hardly besaid that all these events are supposed to be happening in the yearsbefore the war. ) Negotiations are entered into with a group of Frenchbanks and an English issuing house. The French banks take over theirshare, and sell it to their customers who are, or were, in the habit offollowing the lead of their bankers in investment with a blindconfidence, that gave the French banks enormous power in theinternational money market. The English issuing house sends round astockbroker to underwrite the loan. If the issuing house is one that isusually successful in its issues, the privilege of underwriting anythingthat it brings out is eagerly sought for. Banks, financial firms, insurance companies, trust companies and stockbrokers with biginvestment connections will take as much underwriting as they areoffered, in many cases without making very searching inquiry into theterms of the security offered. The name of the issuing house and theamount of the underwriting commission --which we will suppose in thiscase to be 2 per cent. --is enough for them. They know that if theyrefuse any chance of underwriting that is offered, they are not likelyto get a chance when the next loan comes out, and since underwriting isa profitable business for those who can afford to run its risks, manyfirms put their names down for anything that is put before them, as longas they have confidence in the firm that is handling the loan. Thispower in the hands of the big issuing houses, to get any loan that theychoose to father underwritten in a few hours by a crowd of eagerfollowers, gives them, of course, enormous strength and lays a heavyresponsibility on them. They only preserve it by being careful in theuse of it, and exercising great discrimination in the class ofsecurities that they handle. 

While the underwriting is going on the prospectus is being prepared bywhich the subscriptions of the public are invited, and in the meantimeit will probably happen that the newspapers have had a hint that aRuritanian loan is on the anvil, so that preliminary paragraphs mayprepare an atmosphere of expectancy. News of a forthcoming new issue isalways a welcome item in the dull routine of a City article, and thejournalists are only serving their public and their papers in beingeager to chronicle it. Lurid stories are still handed down by Citytradition of how great City journalists acquired fortunes in days goneby, by being allotted blocks of new loans so that they might expand ontheir merits and then sell them at a big profit when they had created apublic demand for them. There seems to be no doubt that this kind ofthing used to happen in the dark ages when finance and City journalismdid a good deal of dirty business between them. Now, the City columns ofthe great daily papers have for a very long time been free from anytaint of this kind, and on the whole it may be said that finance is avery much cleaner affair than either law or politics. It is true thatswindles still happen in the City, but their number is trivial comparedwith the volume of the public's money that is handled and invested. Itis only in the by-ways of finance and in the gutters of City journalismthat the traps are laid for the greedy and gullible public, and if thepublic walks in, it has itself to blame. A genuine investor who wantssecurity and a safe return on his money can always get it. Unfortunatelythe investor is almost always at the same time a speculator, and is aptto forget the distinction; and those who ask for a high rate ofinterest, absolute safety and a big rise in the prices of securitiesthat they buy are only inviting disaster by the greed that wants theunattainable and the gullibility that deludes them into thinking theycan have it. 

To return to our Ruritanian loan, which we left being underwritten. Theprospectus duly comes out and is advertised in the papers and sownbroadcast over the country through the post. It offers £1, 500, 000 (partof £3, 000, 000 of which half is reserved for issue in Paris), 4-1/2 percent. Bonds of the Kingdom of Ruritania, with interest payable on April1st and October 1st, redeemable by a cumulative Sinking Fund of 1 percent. , operating by annual drawings at par, the price of issue being 97, payable as to 5 per cent. On application, 15 per cent. On allotment andthe balance in instalments extending over four months. Coupons and drawnbonds are payable in sterling at the countinghouse of the issuing firm. The extent of the other information given varies considerably. Somefirms rely so far on their own prestige and the credit of those on whoseaccount they offer loans, that they state little more than the bareterms of the issue as given above. Others deign to give detailsconcerning the financial position of the borrowing Government, such asits revenue and expenditure for a term of years, the amount of itsoutstanding debt, and of its assets if any. If the credit of theKingdom of Ruritania is good, such a loan as here described would be, or would have been before the war, an attractive issue, since theinvestor would get a good rate of interest for his money, and would becertain of getting par or £100, some day, for each bond for which he nowpays £97. This is ensured by the action of the Sinking Fund of 1 percent. Cumulative, which works as follows. Each year, as long as the loanis outstanding the Kingdom of Ruritania will have to put £165, 000 in thehands of the issuing houses, to be applied to interest and Sinking Fund. In the first year interest at 4-1/2 per cent. Will take £135, 000 andSinking Fund (1 per cent. Of £3, 000, 000) £30, 000; this £30, 000 will beapplied to the redemption of bonds to that value, which are drawn bylot; so that next year the interest charge will be less and the amountavailable for Sinking Fund will be greater; and each year thecomfortable effect of this process continues, until at last the wholeloan is redeemed and every investor will have got his money back andsomething over. The effect of this obligation to redeem, of course, makes the market in the loan very steady, because the chance of beingdrawn at par in any year, and the certainty of being drawn if theinvestor holds it long enough, ensures that the market price will bestrengthened by this consideration. 

Such being the terms of the loan we may be justified in supposing--ifRuritania has a clean record in its treatment of its creditors, and ifthe issuing firm is one that can be relied on to do all that can be doneto safeguard their interests, that the loan is a complete success and isfully subscribed for by the public. The underwriters will consequentlybe relieved of all liability and will pocket their 2 per cent. , whichthey have earned by guaranteeing the success of the issue. If somefinancial or political shock had occurred which made investors reluctantto put money into anything at the time when the prospectus appeared orsuggested the likelihood that Ruritania might be involved in war, thenthe underwriters would have had to take up the greater part of the loanand pay for it out of their own pockets; and this is the risk for whichthey are given their commission. Ruritania will have got its money lessthe cost of underwriting, advertising, commissions, 1 per cent. Stamppayable to the British Government, and the profit of the issuing firm. Some shipyard in the north will lay down a battleship and Englishshareholders and workmen will benefit by the contract, and the investorswill have got well secured bonds paying them a good rate of interest andlikely to be easily saleable in the market if the holders want to turnthem into cash. The bonds will be large pieces of paper stating thatthey are 4-1/2 per cent, bonds of the Kingdom of Ruritania for £20, £100, £500 or £1000 as the case may be, and they will each have a sheetof coupons attached, that is, small pieces to be cut off and presentedat the date of each interest payment; each one states the amount dueeach half year and the date when it will have to be met. 

Bonds are called bearer securities, that is to say, possession of thementitles the bearer to receive payment of them when drawn and to collectthe coupons at their several dates. They are the usual form for thedebts of foreign Governments and municipalities, and of foreign railwayand industrial companies. 

In England we chiefly affect what are called registered and inscribedstocks--that is, if our Government or one of our municipalities issues aloan, the subscribers have their names registered in a book by thedebtor, or its banker, and merely hold a certificate which is a receipt, but the possession of which is not in itself evidence of ownership. There are no coupons, and the half-yearly interest is posted tostockholders, or to their bankers or to any one else to whom they maydirect it to be sent. Consequently when the holder sells it is notenough for him to hand over his certificate, as is the case with abearer security, but the stock has to be transferred into the name ofthe buyer in the register kept by the debtor, or by the bank whichmanages the business for it. 

When the securities offered are not loans by public bodies, butrepresent an interest in a company formed to build a railway or carry onany industrial or agricultural or mining enterprise, the procedure willbe on the same lines, except that the whole affair will be on a lessexalted plane. Such an issue would not, save in exceptionalcircumstances, as when a great railway is offering bonds or debenturestock, be fathered by one of the leading financial firms. Industrialventures are associated with so many risks that they are usually left tothe smaller fry, and those who underwrite them expect higher rates ofcommission, while subscribers can only be tempted by anticipations ofmore mouth-filling rates of interest or profit. This distinction betweeninterest and profit brings us to a further difference between thesecurities of companies and public bodies. Public bodies do not offerprofit, but interest, and the distinction is very important. AGovernment asks for your money and promises to pay a rate for it, whether the object on which the money is spent be profit-earning or no, and, if it is, whether a profit be earned or no. A company askssubscribers to buy it up and become owners of it, taking its profits, that it expects to earn, and getting no return at all on their money ifits business is unfortunate and the profits never make their appearance. Consequently the shareholders in a company run all the risks thatindustrial enterprise is heir to, and the return, if any, that comesinto their pockets depends on the ability of the enterprise to earnprofits over and above all that it has to pay for raw material, wagesand other working expenses, all of which have to be met before theshareholder gets a penny. 

In order to meet the objections of steady-going investors to the risksinvolved by thus becoming industrial adventurers, a system has grown upby which the capital of companies is subdivided into securities thatrank ahead of one another. Companies issue debts, like public bodies, inthe shape of bonds or debenture stocks, which entitle the holders ofthem to a stated rate of interest, and no more, and are often repayableat a due date, by drawings or otherwise. These are the first charge onthe concern after wages and other working expenses have been paid, andthe shareholders do not get any profit until the interest on thecompany's debt has been met. Further, the actual capital held by theshareholders is generally divided into two classes, preference andordinary, of which the preference take a fixed rate before the ordinaryshareholders get anything, and the ordinary shareholders take the wholeof any balance left over. Sometimes, the preference holders have aright to further participation after the ordinary have received acertain amount of dividend, or share of profit, and there are almostendless variations of the manner in which the different classes ofholders may claim to divide the profits, by means of preference, preferred, ordinary, preferred ordinary, deferred ordinary, founders'shares, management shares, etc. , etc. 

All these variations in the position of the shareholder, however, do notalter the great essential difference between him and the creditor, theman who lends money to a Government or enterprise with a fixed rate ofinterest, and, in most cases, a claim for repayment sooner or later. Theshareholder, whether preference or ordinary, puts his money into aventure with no claim for repayment, unless the company is wound up, inwhich case his claim ranks, of course, after that of every creditor. Ifhe wants to get his money out again he can only do so by selling hisstock or shares at any price that they will fetch in the stock market. 

Thus, if we take as an example a Brewery company with a total debt andcapital of three millions, we may suppose that it will have a million4-1/2 per cent, debenture stock, entitling the creditors who own it tointerest at that rate, and repayment in 1935, a million of 6 per cent. Cumulative preference stock, giving holders a fixed dividend, if earned, of 6 per cent, which dividend and all arrears have to be paid before theordinary shareholders get anything, and a million in ordinary shares of£10 each, whose holders take any balance that may be left. This is thetotal of the money that has been received from the public when thecompany was floated and put into the brewery plant, tied houses, orother assets out of which the company makes its revenue. 

These bonds and stocks and shares are the machinery of internationalfinance, by which moneylenders of one nation provide borrowers in otherswith the wherewithal to carry out enterprises, or make payments forwhich they have not cash available at home. It was shown in a previouschapter that bills of exchange are a means by which the movements ofcommodities from market to market are financed, and the gap in time isbridged between production and consumption. Stock Exchange securitiesare more permanent investments, put into industry for longer periods orfor all time. Midway between them are securities such as Treasury billswith which Governments raise the wind for a time, pending the collectionof revenue, and the one or two years' notes with which Americanrailroads lately financed themselves for short periods, in the hope thatthe conditions for an issue of bonds with longer periods to run, mightbecome more favourable. 

So far we have only considered the machinery by which these securitiesare created and issued to the public, but it must not be supposed thatinvestment is only possible when new securities are being offered. Manyinvestors have a prejudice against ever buying a new security, preferring those which have a record and a history behind them, andbuying them in the market whenever they have money to invest. Thismarket is the Stock Exchange in which securities of all kinds and of allcountries are dealt in. Following the history of the Ruritanian loan, we may suppose that it will be dealt in regularly in that section of theStock Exchange in which the loans of Foreign Governments are marketed. Any original subscriber who wants to turn his bonds into money can do soby instructing his broker to sell them; anyone who wants to do so canacquire a holding in them by a purchase. The terms on which they will bebought or sold will depend on the variations in the demand for, andsupply of, them. If a number of holders want to sell, either becausethey want cash for other purposes, or because they are nervous about thepolitical outlook, or because they think that money is going to bescarce and so there will be better opportunities for investment lateron, then the price will droop. But if the political sky is serene andpeople are saving money fast and investing it in Stock Exchangesecurities, then the price will go up and those who want to buy it willpay more. The price of all securities, as of everything else, depends onthe extent to which people who have not got them demand them, inrelation to the extent to which those who have got them are ready topart with them. Price is ultimately a question of what people thinkabout things, and this is why the fluctuations in the price of StockExchange securities are so incalculable and often so irrational. If asufficient number of misguided people with money in their pockets thinkthat a bad security is worth buying they will put the price of it up inthe face of the logic of facts and all the arguments of reason. Thesewild fluctuations, of course, take place chiefly in the more speculativesecurities. Shares in a gold mine can go to any price that the credulityof buyers dictates, since there is no limit to the amount of gold thatpeople can imagine to be under the ground in its territory. 

All the Stock Exchanges of the world are in communication with oneanother by telegraph, or telephone, and so their feelings about pricesreact on one another's nerves and imaginations, and the Stock Exchangeprice list may be said to be the language of international finance, asthe bill of exchange is its currency. 

CHAPTER IV. 

FINANCE AND TRADE

We have seen that finance becomes international when capital goesabroad, by being lent by investors in one country to borrowers inanother, or by being invested in enterprises formed to carry on somekind of business abroad. We have next to consider why capital goesabroad and whether it is a good or a bad thing, for it to do so. 

Capital goes abroad because it is more wanted in other countries than inthe country of its origin, and consequently those who invest abroad areable to do so to greater advantage. In countries like England andFrance, where there have been for many centuries thrifty folk who havesaved part of their income, and placed their savings at the disposal ofindustry, it is clear that industry is likely to be better suppliedwith capital than in the new countries which have been more latelypeopled, and in which the store of accumulated goods is less adequate tothe industrial needs of the community. For we must always remember thatthough we usually speak and think of capital as so much money it isreally goods and property. In England money consists chiefly of creditin the books of banks, which can only be created because there isproperty on which the banks can make advances, or because there isproperty expressed in securities in which the banks can invest oragainst which they can lend. Because our forefathers did not spend alltheir incomes on their own personal comfort and amusement but put alarge part of them into railways and factories, and shipbuilding yards, our country is now reasonably well supplied with the machinery ofproduction and the means of transport. Whether it might not be muchbetter so equipped is a question with which we are not at presentconcerned. At least it may be said that it is more fully provided inthese respects than new countries like our colonies, America andArgentina, or old countries like Russia and China in which industrialdevelopment is a comparatively late growth, so that there has been lesstime for the storing up, by saving, of the necessary machinery. 

So it comes about that new countries are in greater need of capital thanold ones and consequently are ready to pay a higher rate of interest forit to lenders or to tempt shareholders with a higher rate of profit. Andso the opportunity is given to investors in England to develop theagricultural or industrial resources of all the countries under the sunto their own profit and to that of the countries that it supplies. When, for example, the Government of one of the Australian colonies came toLondon to borrow money for a railway, it said in effect to Englishinvestors, "Your railways at home have covered your country with such anetwork that there are no more profitable lines to be built. The returnthat you get from investing in them is not too attractive in view of allthe trade risks to which they are subject. Do not put your money intothem, but lend it to us. We will take it and build a railway in acountry which wants them, and, whether the railway pays or no, you willbe creditors of a Colonial Government with the whole wealth of thecolony pledged to pay you interest and pay back your money when the loanfalls due for repayment. " For in Australia the railways have all beenbuilt by the Colonial Governments, partly because they wished, bypledging their collective credit, to get the money as cheaply aspossible, and keep the profits from them in their own hands, and partlyprobably because they did not wish the management of their railways tobe in the hands of London boards. In Argentina, on the other hand, thechief railways have been built, not by the Government but by Englishcompanies, shareholders in which have taken all the risks of theenterprise, and have thereby secured handsome profits to themselves, tempered with periods of bad traffic and poor returns. 

For many years there was a good deal of prejudice in England againstinvesting abroad, especially among the more sleepy classes of investorswho had made their money in home trade, and liked to keep it there whenthey invested it. As traders, we learnt a world-wide outlook manycenturies before we did so as investors. To send a ship with a cargo ofEnglish goods to a far off country to be exchanged into its products wasa risk that our enterprising forefathers took readily. The ship took inits return cargo and came home, bringing its sheaves with it in areasonable time, though the Antonios of the period sometimes had awkwardmoments if their ships were delayed by bad weather, and they were liableon a bond to Shylock. But it was quite another matter to lend money in adistant country when communication was slow and difficult, and socialand political conditions had not gained the stability that is neededbefore contracts can be entered into extending over many years. International moneylending took place, of course, in the middle ages, and everybody knows Motley's great description of the consternation thatshook Europe when Philip the Second repudiated his debts "to put an endto such financiering and unhallowed practices with bills ofexchange. "[3] But though there were moneylenders in those days whoobliged foreign potentates with loans, the business was in the hands ofexpert professional specialists, and there was no medieval counterpartof the country doctor whom we have imagined to be developing industryall over the world by placing his savings in foreign countries. Therecould be no investing public until there were large classes that hadaccumulated wealth by saving, and until the discovery of the principleof limited liability enabled adventurers to put their savings intoindustry without running the risk of losing not only what they put in, but all else that they possessed. By means of this system, the risk of ashareholder in a company is limited to a definite amount, usually theamount that has been paid up on his shares or stock, though in somecases, such as bank and insurance shares, there is a further reserveliability which is left for the protection of the companies' customers. 

In the eighteenth century a great outburst of gambling in the EastIndian and South Sea companies, and a horde of less notorious concernswas a short-lived episode which must have helped for a very long time tostrengthen the natural prejudice that investors feel in favour ofputting their money into enterprise at home; and it was still furtherstrengthened by the disastrous results of another great plague of badforeign securities that smote London just after the war that ended atWaterloo. This prejudice survived up to within living memory, and I haveheard myself old-fashioned stockbrokers maintain that, after all, therewas no investment like Home Rails, because investors could always go andlook at their property, which could not run away. Gradually, however, the habit of foreign investment grew, under the influence of the higherrates of interest and profit offered by new countries, the greaterpolitical stability that was developed in them, and politicalapprehensions at home. In fact it grew so fast and so lustily that therecame a time, not many years ago, when investments at home were under acloud, and many clients, when asking their brokers where and how toplace their savings, stipulated that they must be put somewhere abroad. 

This was at a time when Mr. Lloyd George's financial measures werearousing resentment and fear among the investing classes, and whenpreachers of the Tariff Reform creed were laying so much stress on our"dying industries" that they were frightening those who trusted theminto the belief that the sun was setting on our industrial greatness. The effect of this belief was to bring down the prices of homesecurities, and to raise those of other countries, as investors changedfrom the former into the latter. 

So the theory that we were industrially and financially doomed gotanother argument from its own effects, and its missionaries were able topoint to the fall in Consols and the relative steadiness of foreign andcolonial securities which their own preaching had brought about, asfresh evidence of its truth. At the same time fear of Socialisticlegislation at home had the humorous result of making British investorsfear to touch Consols, but rush eagerly to buy the securities ofColonial Governments which had gone much further in the direction ofSocialism than we had. Those were great days for all who handled themachinery of oversea investment and in the last few years before thewar it is estimated that England was placing some 200 millions a year inher colonies and dependencies and in foreign countries. Old-fashionedfolk who still believed in the industrial strength and financialstability of their native land waited for the reaction which was boundto follow when some of the countries into which we poured capital sofreely, began to find a difficulty in paying the interest; and justbefore the war this reaction began to happen, in consequence of thedefault in Mexico and the financial embarrassments of Brazil. Mexico hadshown that the political stability which investors had believed it tohave achieved was a very thin veneer and a series of revolutions hadplunged that hapless land into anarchy. Brazil was suffering from aheavy fall in the price of one of her chief staple products, rubber, owing to the competition of plantations in Ceylon, Straits Settlementsand elsewhere, and was finding difficulty in meeting the interest on thebig load of debt that the free facilities given by English and Frenchinvestors had encouraged her to pile up. She had promised retrenchmentat home, and another big loan was being hatched to tide her over herdifficulties--or perhaps increase them--when the war cloud began togather and she has had to resort for the second time in her history tothe indignity of a funding scheme. By this "new way of paying old debts"she does not pay interest to her bondholders in cash, but gives thempromises to pay instead, and so increases the burden of her debt, whichshe hopes some day to be able to shoulder again, by resuming payments incash. 

Mexico and Brazil were not the only countries that were showing signs, in 1914, of having indulged too freely in the opportunities given themby the eagerness of English and French investors to place money abroad. It looked as if in many parts of the earth a time of financialdisillusionment was dawning, the probable result of which would havebeen a strong reaction in favour of investment at home. Then came thewar with a short sharp spell of financial chaos followed by a halcyonperiod for young countries, which enabled them to sell their products atgreatly increased prices to the warring powers and so to meet theirdebt charges with an ease that they had never dreamt of, and even tofind themselves lending, out of the abundance of their war profits, money to their creditors. America has led the way with a loan of £100millions to France and England, and Canada has placed 10 millions ofcredit at the disposal of the Mother Country. There can be little doubtthat if the war goes on, and the neutral countries continue to pile upprofits by selling food and war materials to the belligerents, many ofthem will find it convenient to lend some of their gains to theircustomers. America has also been taking the place of France and Englandas international moneylenders by financing Argentina; and a greatcompany has been formed in New York to promote international activity, on the part of Americans, in foreign countries. "And thus the whirligigof time, " assisted by the eclipse of civilization in Europe, "brings inhis revenges" and turns debtors into creditors. In the meantime it needhardly be said that investment at home has become for the time being amatter of patriotic duty for every Englishman, since the financing ofthe war has the first and last claim on his savings. 

Our present concern, however, is not with the war problems of to-day, but with the processes of international finance in the past, andperhaps, before we get to the end, with some attempt to hazard a glimpseinto its arrangements in the future. What was the effect on England, andon the countries to whom she lent, of her moneylending activity in thepast? As soon as we begin to look into this question we see once morehow close is the connection between finance and trade, and that financeis powerless unless it is supported and in fact made possible byindustrial or commercial activity behind it. England's internationaltrade made her international finance possible and necessary. A countrycan only lend money to others if it has goods and services to supply, for in fact it lends not money but goods and services. 

In the beginnings of international trade the older countries exchangetheir products for the raw materials and food produced by the new ones. Then, as emigrants from the old countries go out into the new ones, they want to be supplied with the comforts and appliances of the oldercivilizations, such as, to take an obvious example, railways. But as theproductions of the new countries, at their early stage of development, do not suffice to pay for all the material and machinery needed forbuilding railways, they borrow, in effect, these materials, in theexpectation that the railways will open out their resources, enable themto put more land under the plough and bring more stuff to the seaboard, to be exchanged for the products of Europe. The new country, New Zealandor Japan, or whichever it may be, raises a loan in England for thepurpose of building a railway, but it does not take the money raised bythe loan in the form of money, but in the form of goods needed for therailway, and sometimes in the form of the services of those who plan andbuild it. It does not follow that all the stuff and services needed forthe enterprise are necessarily bought in the country that lends themoney; for instance, if Japan borrows money from us for a railway, shemay buy some of the steel rails and locomotives in Belgium, andinstruct us to pay Belgium for her purchases. If so, instead of sendinggoods to Japan we shall have to send goods or services to Belgium, orpay Belgium with the claim on some other country that we haveestablished by sending goods or services to it. But, however long thechain may be, the practical fact is that when we lend money we lendsomebody the right to claim goods or services from us, whether they aretaken from us by the borrower, or by somebody to whom the borrower givesa claim on us. 

If, whenever we made a loan, we had to send the money to the borrower inthe form of gold, our gold store would soon be used up, and we shouldhave to leave off lending. In other words, our financiers would have toretire from business very quickly if it were not that our manufacturersand shipowners and all the rest of our industrial army produced thegoods and services to meet the claims on our industry given, or ratherlent, to other countries by the machinery of finance. 

This obvious truism is often forgotten by those who look on finance asan independent influence that can make money power out of nothing; andthose who forget it are very likely to find themselves entangled in amaze of error. We can make the matter a little clearer if we go back tothe original saver, whose money, or claims on industry, is handled bythe professional financier. Those who save do so by going withoutthings. Instead of spending their earnings on immediate enjoyment theyspend part of them in providing somebody else with goods that they need, and taking from that somebody else an annual payment for the use ofthese goods for a certain period, after which, if it is a case of aloan, the transaction is closed by repayment of the advance, which againis effected by a transfer of goods. When our country doctor subscribesto an Australian loan raised by a colony for building a railway, hehands over to the colony money which a less thrifty citizen would havespent on pleasures and amusements, and the colony uses it to buy railwaymaterial. Thus in effect the doctor is spending his money in making arailway in Australia. He is induced to do so by the promise of thecolony to give him £4 every year for each £100 that he lends. If therewere not enough people like him to put money into industry instead ofspending it on themselves, there could be no railway building or anyother form of industrial growth. It is often contended that areconstruction of society on a Socialistic basis would abolish thecapitalist; but in fact it would make everybody a capitalist because theState would have to make the citizens as a whole go without certainimmediate enjoyments and work on the production of the machinery ofindustry. Instead of saving being left to the individual and rewarded bya rate of interest, it would be imposed on all and rewarded by a greaterproductive power, and consequent increase in commodities, enjoyed by thecommunity and distributed among all its members. The advantages, onpaper, of such an arrangement over the present system are obvious. Whether they would be equally obvious in practice would depend on thediscretion with which the Government handled the enormous responsibilityplaced in its hands. But the essential fact that capital can only be gotby being saved, and earns the reward that it gets, would remain asstrongly in force as ever, and will do so until we have learnt to makegoods out of nothing and without effort. 

Going back to our doctor, who lends railway material to an Australiancolony, we see that every year for each £100 lent the colony has to sendhim £4. This it can only do if its mines and fields and factories canturn out metals or wheat or wool, or other goods which can be shipped toEngland or elsewhere and be sold, so that the doctor's £4 is provided. And so though on both sides the transaction is expressed in money it isin fact carried out in goods, both when the loan is made and theinterest is paid. And finally when the loan is paid back again, thecolony must have sold goods to provide repayment, unless it meets itsdebts by raising another. But when a loan is well spent on a railwaythat is needed for the development of a fertile or productive district, it justifies itself by cheapening transport and quickening the output ofwealth in such a manner, that the increased volume of goods that it hashelped to create easily meets the interest due to lenders, provides afund for its redemption at maturity, and leaves the borrower better off, with a more fully equipped productive system. 

Since, then, there is this close and obvious connection between financeand trade, it is inevitable that all who partake in the activities ofinternational finance should find their trade quickened by it. Englandhas lent money abroad because she is a great producer, and certainclasses of Englishmen are savers, so that there was a balance of goodsavailable for export, to be lent to other countries. In the early yearsof the nineteenth century, when our industrial power was first beginningto gather strength, we used regularly to export goods to a greater valuethan we imported. These were the goods that we were lending abroad, clearly showing themselves in our trade ledger. Since then the accounthas been complicated by the growth of the amount that our debtors owe usevery year for interest, and by the huge earnings of our merchant navy, which other countries pay by shipping goods to us, so that, by thegrowth of these items, the trade balance sheet has been turned in theother direction, and in spite of our lending larger and larger amountsall over the world we now have a balance of goods coming in. Interestdue to us and shipping freights and the commissions earned by ourbankers and insurance companies were estimated before the war to amountto something like 350 millions a year, so that we were able to lendother countries some 200 millions or more in a year and still take fromthem a very large balance in goods. After the war this comfortable stateof affairs will have been modified by the sales that we are making nowin New York of the American Railroad bonds and shares that representedthe savings that we had put into America in former years, and by theextent of our war borrowings in America, and elsewhere, if we widen thecircle of our creditors. The effect of this will be that we shall oweAmerica for interest on the money that it is lending us, and that itwill owe us less interest, owing to the blocks of its securities that itis buying back. Against this we shall be able to set debts due to usfrom our Allies, but if our borrowings and sales of securities exceedour lendings as the war goes on, we shall thereby be poorer. Our poweras a creditor country will be less, until by hard work and strict savingwe have restored it. This we can very quickly do, if we remember andapply the lessons that war is teaching us about the number of peopleable to work, whose capacity was hitherto left fallow, that this countrycontained, and also about the ease with which we can dispense, when agreat crisis makes us sensible, with many of the absurdities andfutilities on which much of our money, and productive capacity, used tobe wasted. 

FOOTNOTES:

[Footnote 3: "United Netherlands, " chap. Xxxii. ]

CHAPTER V

THE BENEFITS OF INTERNATIONAL FINANCE

When once we have recognized how close is the connection between financeand trade, we have gone a long way towards seeing the greatness of theservice that finance renders to mankind, whether it works at home orabroad. At home we owe our factories and our railways and all themarvellous equipment of our power to make things that are wanted, to thequiet, prosaic, and often rather mean and timorous people who have savedmoney for a rainy day, and put it into industry instead of intosatisfying their immediate wants and cravings for comfort and enjoymentIt is equally, perhaps still more, true, that we owe them to the brainsand energy of those who have planned and organized the equipment ofindustry, and the thews and sinews of those who have done the heavywork. But brain and muscle would have been alike powerless if there hadnot been saving folk who lent them raw material, and provided them withthe means of livelihood in the interval between the beginning of anindustry and the day when its product is sold and paid for. 

Abroad, the work of finance has been even more advantageous to mankind, for since it has been shown that international finance is a necessarypart of the machinery of international trade, it follows that all thebenefits, economic and other, which international trade has wrought forus, are inseparably and inevitably bound up with the progress ofinternational finance. If we had never fertilized the uttermost parts ofthe earth by lending them money and sending them goods in payment of thesums lent, we never could have enjoyed the stream that pours in fromthem of raw material and cheap food which has sustained our industry, fed our population, and given us a standard of general comfort such asour forefathers could never have imagined. It is true that at the sametime we have benefited others, besides our own customers and debtors. We have opened up the world to trade and other countries reap anadvantage by being able to use the openings that we have made. It issometimes argued that we have in fact merely made the paths of ourcompetitors straight, and that by covering Argentina with a network ofrailways and so enormously increasing its power to grow things and so tobuy things, we have been making an opportunity for German shipbuildersto send liners to the Plate and for German manufacturers to undersellours with cheap hardware and cotton goods. This is, undoubtedly, true. The great industrial expansion of Germany between 1871 and 1914, hascertainly been helped by the paths opened for it all over the world byEnglish trade and finance; and America, our lusty young rival, that isgaining so much strength from the war in which Europe is weakeningitself industrially and financially, will owe much of the ease of herprospective expansion to spade-work done by the sleepy Britishers. Itmay almost be said that we and France as the great providers of capitalto other countries have made a world-wide trade possible on its presentscale. The work we have done for our own benefit has certainly helpedothers, but it does not, therefore, follow that it has damaged us. 

Looking at the matter from a purely business point of view, we see thatthe great forward movement in trade and finance that we have led andfostered, has helped us even by helping our rivals. In the first place, it gives us a direct benefit as the owners of the mightiest fleet ofmerchant ships that the world has seen. We do nearly half the world'scarrying trade, and so have reason to rejoice when other nations sendgoods to the ports that we have opened. By our eminence in finance andthe prestige of a bill of exchange drawn on London, we have alsosupplied the credit by which goods have been paid for in the country oftheir origin, and nursed until they have come to the land in which theyare wanted, and even until the day when they have been turned into afinished product and passed into the hands of the final consumer. Butthere is also the indirect advantage that we gain, as a nation ofproducers and financiers, from the growing wealth of other nations. Themore wealthy they grow, the more goods they produce want to sell to us, and they cannot sell to us unless they likewise buy from us. If wehelped Germany to grow rich, we also helped her to become one of ourbest customers and so to help us to grow rich. Trade is nothing but anexchange of goods and services. Other countries are not so philanthropicas to kill our trade by making us presents of their products and fromthe strictly economic point of view, it pays us to see all the world, which is our market, a thriving hive of industry eager to sell us as asit can. It may be that as other countries, with the help of our capitaland example, develop industries in which we have been pre-eminent, theymay force us to supply them with services of which we are less proud tobe the producers. If, for example, the Americans were to drive us out ofthe neutral markets with their cotton goods, and then spent theirprofits by revelling in our hotels and thronging out theatres andshooting in Highland deer forests, and buying positions in Englishsociety for their daughters we should feel that the course of industrymight still be profitable to us, but that it was less satisfactory. Onthe other hand, it would be absurd for us to expect the rest of theworld to stand still industrially in order that we may make profits fromproducing things for it that it is quite able to make for itself. 

For the present we are concerned with the benefits of internationalfinance, which have been shown to begin with its enormous importance asthe handmaid of international trade. Trade between nations is desirablefor exactly the same reason as trade between one man and another, namely, that each is, naturally or otherwise, better fitted to grow ormake certain things, and so an exchange is to their mutual advantage. Ifthis is so, as it clearly is, in the case of two men living in the samestreet, it is evidently very much more so in the case of two peoplesliving in different climates and on different soils, and so each ofthem, by the nature of their surroundings, able to make and grow thingsthat are impossible to the other. English investors, by developing theresources of other countries, through the machinery of internationalfinance, enable us to sit at home in this inclement isle, and enjoy thefruits of tropical skies and soils. It may be true that if they had notdone so we should have developed the resources of our own country morethoroughly, using it less as a pleasure ground, and more as a farm andkitchen garden, and that we should have had a larger number of our ownfolk working for us under our own sky. Instead of thriving on theproduce of foreign climes and foreign labour that comes to us to payinterest, we should have lived more on home-made stuff and had morehealthy citizens at work on our soil. On the other hand, we should havebeen hit hard by bad seasons and we should have enjoyed a much lessdiversified diet. As it is, we take our tea and tobacco and coffee andsugar and wine and oranges and bananas and cheap bread and meat, all asa matter of course, but we could never have enjoyed them ifinternational trade had not brought them to our shores, and ifinternational finance had not quickened and cheapened their growth andtransport and marketing. International trade and finance, if given afree hand, may be trusted to bring about, between them, the utmostpossible development of the power of the world to grow and make thingsin the places where they can be grown and made most cheaply andabundantly, in other words, to secure for human effort, working on theavailable raw material, the greatest possible harvest as the reward ofits exertions. 

All this is very obvious and very material, but international financedoes much more, for it is a great educator and a mighty missionary ofpeace and goodwill between nations. This also is obvious on a moment'sreflection, but it will be rejected as a flat mis-statement by manywhose opinion is entitled to respect, and who regard internationalfinance as a bloated spider which sits in the middle of a web ofintrigue and chicanery, enticing hapless mankind into its toils andbattening on bloodshed and war. So clear-headed a thinker as Mr. PhilipSnowden publicly expressed the view not long ago that "the war was theresult of secret diplomacy carried on by diplomatists who had conductedforeign policy in the interests of militarists and financiers, "[4] NowMr. Snowden may possibly be right in his view that the war was producedby diplomacy of the kind that he describes, but with all deference Isubmit that he is wholly wrong if he thinks that the financiers, asfinanciers, wanted war either here or in Germany or anywhere else. Ifthey wanted war it was because they believed, rightly or wrongly, thattheir country had to fight for its existence, or for something equallywell worth fighting for, and so as patriotic citizens, they accepted oreven welcomed a calamity that could only cause them, as financiers, thegreatest embarrassment and the chance of ruin. War has benefited theworking classes, and enabled them to take a long stride forward, whichwe must all hope they will maintain, towards the improvement in theirlot which is so long overdue. It has helped the farmers, put fortunes inthe pockets of the shipowners, and swollen the profits of anymanufacturers who have been able to turn out stuff wanted for war or forthe indirect needs of war. The industrial centres are bursting withmoney, and the greater spending power that has been diffused by warexpenditure has made the cheap jewellery trade a thriving industry andincreased the consumption of beer and spirits in spite of restrictionsand the absence of men at the front. Picture palaces are crammednightly, furs and finery have had a wonderful season, any one who has amotor car to sell finds plenty of ready buyers, and second-hand pianosare an article that can almost be "sold on a Sunday. " But in the midstof this roar of humming trade, finance, and especially internationalfinance, lies stricken and still gasping from the shock of war. When warcomes, the price of all property shrivels. This was well known toFalstaff, who, when he brought the news of Hotspur's rebellion, said"You may buy land now as cheap as stinking mackerel, " To most financialinstitutions, this shrivelling process in the price of their securitiesand other assets, brings serious embarrassment, for there is nocorresponding decline in their liabilities, and if they have not foundedthemselves on the rock of severest prudence in the past, their solvencyis likely to be imperilled. Finance knew that it must suffer. The storyhas often been told, and though never officially confirmed, it has atleast the merit of great probability, that in 1911 when the Moroccocrisis made a European war probable, the German Government was held backby the warning of its financiers that war would mean Germany's ruin. Itis more than likely that a similar warning was given in July, 1914, butthat the war party brushed it aside. And now that war is upon us, we arebeing warned that high finance is intriguing for peace. Mr. EdgarCrammond, a distinguished economist and statistician, published anarticle in the _Nineteenth Century_ of September, 1915, entitled "HighFinance and a Premature Peace, " calling attention to this danger andurging the need for guarding against it. First too bellicose and now toopacific, High Finance is buffeted and spat upon by men of peace and menof war with a unanimity that must puzzle it. It can hardly err on bothsides, but of the two accusers I think that Mr. Crammond is much morelikely to be right. But my own personal opinion is that both theseaccusers are mistaken, that the financiers never wanted war, that if(which I beg to doubt) diplomacy conducted in their interests producedthe war, that was because diplomacy misunderstood and bungled theirinterests, and that now that the war is upon us, the financiers, thoughall their interests urge them to want peace, would never be parties tointrigues for a peace that was premature or ill-judged. 

Perhaps I have a weakness for financiers, but if so it is entitled tosome respect, because it is based on closer knowledge of them than isowned by most of their critics. For years it was my business as a Cityjournalist, to see them day by day; and this daily intercourse withfinanciers has taught me that the popular delusion that depicts them ashard, cruel, ruthless men, living on the blood and sweat of humanity, and engulfed to their eyebrows in their own sordid interests, is aboutas absurd a hallucination as the stage Irishman. Financiers are quitehuman--quiet, mild, good-natured people as a rule, many of them spendingmuch time and trouble on good works in their leisure hours. What theywant as financiers is plenty of good business and as little as possibledisturbance in the orderly course of affairs. Such a cataclysm as thepresent war could only terrify them, especially those with interests inevery country of the world. When war comes, especially such a war asthis, financing in its ordinary and most profitable sense has to put upits shutters. Nobody can come to London now for loans except theBritish, or French, Governments, or, occasionally, one of our colonies. Any other borrower is warned off the field by a ruthless Committee whoseleave has to be granted before dealings in new securities are allowed onthe Stock Exchange. But when the British Government borrows, there areno profits for the rank and file of financiers. No underwriting isnecessary, and the business is carried out by the Bank of England. Thecommissions earned by brokers are smaller, and the whole City feels thatthis is no time for profit-making, but for hard and ill-paid work, withdepleted staffs, to help the great task of financing a great war. TheStock Exchange is half empty and nearly idle. It is tied and bound byall sorts of regulations in its dealings, and its members have probablysuffered as severely from the war as any section of the community. Thefirst interest of the City is unquestionably peace; and the fact thatthe City is nevertheless full of fine, full-flavoured patriotic fervouronly shows that it is ready and eager to sink its interests in favour ofthose of its country. 

Every knot that international finance ties between one country andanother makes people in those two countries interested in their mutualgood relations. The thing is so obvious, that, when one considers thenumber of these knots that have been tied since international financefirst began to gather capital from one country's investors and place itat the disposal of others for the development of their resources, onecan only marvel that the course of international goodwill has not madefurther progress. The fact that it is still a remarkably tender plant, likely to be crushed and withered by any breath of popular prejudice, israther a comforting evidence of the slight importance that mankindattaches to the question of its bread and butter. It is clear that apurely material consideration, such as the interests of internationalfinance, and the desire of those who have invested abroad to receivetheir dividends, weighs very little in the balance when the nationsthink that their honour or their national interests are at stake. Sincethe gilded cords of trade and finance have knit all the world into onegreat market, the proposition that war does not pay has becomeself-evident to any one who will give the question a few minutes'thought. International finance is a peacemaker every time it sends aBritish pound into a foreign country. But its influence as a peacemakeris astonishingly feeble just for this reason, that its appeal is to aninterest which mankind very rightly disregards whenever it feels thatmore weighty matters are in question. The fact that war does not pay isan argument that is listened to as little by a nation when its blood isup, as the fact that being in love does not pay would be heeded by anamorous undergraduate. 

If, then, the voice of international finance is so feeble when it israised against the terrible scourge of war, can it have much force onthe rare occasions when it speaks in its favour? For there is noinconsistency with the view that finance is a peacemaker, if we nowacknowledge that finance may sometimes ask for the exertion of force onits behalf. As private citizens we all of us want to live at peace withour neighbours, but if one of them steals our property or makes a publicnuisance of himself, we sometimes want to invoke the aid of the strongarm of the law in dealing with him. Consequently, although it cannot betrue that finance wanted war such as this one, it cannot be denied thatwars have happened in the past, which have been furthered by financierswho believed that they suffered wrongs which only war could put right. The Egyptian war of 1882 is a case in point, and the South African warof 1899 is another. 

In Egypt international finance had lent money to a potentate ruling aneconomically backward people, without taking much trouble to considerhow the money was to be spent, or whether the country could stand thecharge on its revenues that the loans would involve. The fact that itdid so was from one point of view a blunder and from another a crime, but this habit of committing blunders and crimes, which is sometimesindulged in by finance as by all other forms of human activity, willhave to be dealt with in our next chapter, when we deal with the evilsof international finance. The consequence of this blunder was that Egyptwent into default, and England's might was used on behalf of thebondholders who had made a bad investment. This fact has been putforward by Mr. Brailsford, in his very interesting book on "The War ofSteel and Gold, " and by other writers, to show that our diplomacy is thetool of international finance, and that the forces created by Britishtaxpayers for the defence of their country's honour, are used for thesordid purpose of wringing interest for a set of money-grubbers in theCity, out of a poor and down-trodden peasantry overburdened by theexactions and extortions of their rulers. Mr. Brailsford, of course, puts his case much better than I can, in any brief summary of his views. He has earned and won the highest respect by his power as a brilliantwriter, and by his disinterested and consistent championship of thecause of honesty and justice, wherever and whenever he thinks it to bein danger. Nevertheless, in this matter of the Egyptian war I venture tothink that he is mistaking the tail for the dog. Diplomacy, I fancy, wasnot wagged by finance, but used finance as a very opportune pretext. IfEgypt had been Brazil, it is not very likely that the British fleetwould have shelled Rio de Janeiro. The bondholders would have beenreminded of the sound doctrine, _caveat emptor_, which signifies thatthose who make a bad bargain have only themselves to blame, and mustpocket their loss with the best grace that they can muster. As it was, Egypt had long ago been marked out as a place that England wanted, because of its vitally important position on the way to India. Kinglake, the historian, writing some three-quarters of a century ago, long beforethe Suez Canal was built, prophesied that Egypt would some day be ours. In Chapter XX. Of "Eothen, " comes this well known passage on the Sphynx(he spelt it thus):--

 "And we, we shall die, and Islam will wither away, and the Englishman, leaning far over to hold his loved India, will plant a firm foot on the banks of the Nile, and sit in the seats of the Faithful, and still that sleepless rock will lie watching, and watching the works of the new, busy race, with those same sad, earnest eyes, and the same tranquil mien everlasting. "

After the building of the Canal, the command of this short cut to Indiamade Egypt still more important. England bought shares in the Canal, sousing finance as a means to a political object; and it did so still moreeffectively when it used the Egyptian default and the claims of Englishbondholders as an excuse for taking its seat in Egypt and sitting thereever since. The bondholders were certainly benefited, but it is mybelief that they might have whistled for their money until the crack ofdoom if it had not been that their claims chimed in with Imperialpolicy. It may have been wicked of us to take Egypt, but if so let uslay the blame on the right doorstep and not abuse the poor bondholderand financier who only wanted their money and were used as a stalkinghorse by the Machiavellis of Downing Street. Mr Brailsford's own accountof the matter, indeed, shows very clearly that policy, and not finance, ruled the whole transaction. 

In South Africa there was no question of default, or of sufferingbondholders. There was a highly prosperous mining industry in a countrythat had formerly belonged to us, and had been given back to its Dutchinhabitants under circumstances which the majority of people in thiscountry regarded as humiliating. On this occasion even the pretext waspolitical. It may have been that the English mine-owners thought theycould earn better profits under the British flag than under the rule ofMr. Kruger, though I am inclined to believe that even in their casetheir incentive was chiefly a patriotic desire to repaint in red thatpart of the map in which they carried on their business. Certainly theirgrievance, as it was put before us at home, was frankly and purelypolitical. They said they wanted a vote and that Mr. Kruger would notgive them one. That acute political thinker, Mr. Dooley of Chicago, pointed out at the time that if Mr. Kruger "had spint his life in a raleraypublic where they burn gas, " he would have given them the votes, butdone the counting himself. But Mr. Kruger did not adopt this cynicalexpedient, and public opinion here, though a considerable minoritydetested the war, endorsed the determination of the Government torestore the disputed British suzerainty over the Transvaal into actualsovereignty. Subsequent events, largely owing to the ampleself-government given to the Transvaal immediately after its conquest, have shown that the war did more good than harm; and the splendid defeatof the Germans by the South African forces under General Botha--our mostskilful opponent fifteen years ago--has, we may hope, wiped out alltraces of the former conflict. But what we are now concerned with is thefact, which will be endorsed by all whose memory goes back to thosedays, that the South African war, though instigated and furthered byfinancial interests, would never have happened if public opinion had notbeen in favour of it on grounds which were quite other thanfinancial--the desire to bring back the Transvaal into the BritishEmpire and to wipe out the memory of the surrender after Majuba, andhumanitarian feeling which believed, rightly or wrongly, that thenatives would be treated better under our rule. These may or may nothave been good reasons for going to war, but at least they were notfinancial. 

Summing up the results of this rather discursive chapter we see that thechief benefit conferred on mankind by international finance is aquickening of the pace at which the wealth of the world is increased andmultiplied, by using the capital saved by old countries for fosteringthe productive power of new ones. This is surely something solid on thecredit side of the balance sheet, though it would be a good deal more soif mankind had made better progress with the much more difficult problemof using and distributing its wealth. If the rapid increase of wealthmerely means that honest citizens, who find it as hard as ever to earn aliving, are to be splashed with more mud from more motor-cars full ofmore road hogs, then there is little wonder if the results ofinternational finance produce a feeling of disillusionment. But at leastit must be admitted that the stuff has to be grown and made before itcan be shared, and that a great advance has been made even in thegeneral distribution of comfort. If we still find it hard to make aliving, that is partly because we have very considerably expanded, during the course of the last generation or two, our notion of what wemean by a living. 

As to the sinister influence alleged to be wielded by internationalfinance in the councils of diplomacy, it has been shown that war on agreat scale terrifies finance and inflicts great distress on it. Tosuppose, therefore, that finance is interested in the promotion of suchwars is to suppose that it is a power shortsighted to the point ofimbecility. In the case of wars which finance is believed with sometruth to have helped to instigate, we have seen that it could not havedone so if other influences had not helped it. In short, both theoccurrence of the present war, and the circumstances that led up to warin Egypt and South Africa, have shown how little power finance wields inthe realm of foreign politics. In the City if one suggests that ourForeign Office is swayed by financial influences one is met byincredulous mockery, probably accompanied by assertions that theForeign Office is, in fact, neglectful, to a fault, of British financialinterests abroad, and that when it does, as in China, interfere withfinancial matters, it is apt to tie the hands of finance, in order tofurther what it believes to be the political interests of the country. The formation of the Six Power Group in China meant that the financialstrength of England and France had to be shared, for political reasons, with powers which had, on purely financial grounds, no claim whatever toparticipate in the business of furnishing capital to China. Theintroduction to the 1898 edition of "Fenn on the Funds, " expresses theview that our Government is ready to protect our traders abroad, butonly helps investors when it suits it to do so. "If, " it says, "abarbarian potentate's subjects rob a British trader we never hesitate toinsist upon the payment of liberal compensation, which we enforce ifnecessary by a 'punitive expedition, ' but if a civilized Government robsa large number of British investors, the Government does not even, sofar as we know, enlist the help of its diplomatic service. Only when, as in the case of Egypt, there are important political objects in view, does the State protect those citizens who are creditors of foreignnations. One or two other countries, notably Germany, set us a goodexample, with the best results as far as their investors are concerned. "Germany is often thus taken as the example of the State which gives itsfinanciers the most efficient backing abroad; but even in Germanyfinance is, like everything else, the obedient servant of the militaryand political authorities. For several years before the present war, thefinanciers of Berlin were forbidden to engage in moneylending operationsabroad. No doubt the Government saw that the present war was coming, andso it preferred to keep German money at home. It is true that Germanyonce shook its mailed fist with some vigour on behalf of its financialinterest when it made, with us, a demonstration against Venezuela. Butit is at least possible that it did so chiefly with a view to thepromotion of the popularity of its navy at home, and to making it easierto get the money for its upkeep and increase from the taxpayers, already oppressed by their military burden. In Morocco questions oftrade and finance were at the back of the quarrel, but it would not havebecome acute if it had not been for the expected political consequencesthat were feared from the financial penetration that was beingattempted; and as has been already pointed out, the financiers aregenerally credited with having persuaded Germany to agree to asettlement on that occasion. 

In short, finance, if left to itself, is international and peace-loving. Many financiers are at the same time ardent patriots, and see in theirefforts to enrich themselves and their own country a means forfurthering its political greatness and diplomatic prestige. Man is ajumble of contradictory crotchets, and it would be difficult to findanywhere a financier who lived, as they are all commonly supposed to do, purely for the pleasure of amassing wealth. If such a being could bediscovered he would probably be a lavish subscriber to peace societies, and would show a deep mistrust of diplomatists and politicians. 

FOOTNOTES:

[Footnote 4: Quoted by the _Financial News_ of September 28, 1915. ]

CHAPTER VI

THE EVILS OF INTERNATIONAL FINANCE

No one who writes of the evils of international finance runs any risk ofbeing "gravelled for lack of matter. " The theme is one that has beencopiously developed, in a variety of keys by all sorts and conditions ofcomposers. Since Philip the Second of Spain published his views on"financiering and unhallowed practices with bills of exchange, " andillustrated them by repudiating his debts, there has been a chorus ofopinion singing the same tune with variations, and describing thefinancier as a bloodsucker who makes nothing, and consumes an inordinateamount of the good things that are made by other people. 

It has already been shown that capital, saved by thrifty folk, isessential to industry as society is at present built and worked; and thefinanciers are the people who see to the management of these savings, their collection into the great reservoir of the money market, and theirplacing at the disposal of industry. It seems, therefore, that, thoughnot immediately concerned with the making of anything, the financiersactually do work which is now necessary to the making of almosteverything. Railway managers do not make anything that can be touched orseen, but the power to move things from the place where they are grownor made, to the place where they are eaten or otherwise consumed orenjoyed, is so important that industry could not be carried on on itspresent scale without them; and that is only another way of saying that, if it had not been for the railway managers, a large number of us who atpresent do our best to enjoy life, could never have been born. Financiers are, if possible, even more necessary, to the presentstructure of industry than railway men. If, then, there is this generalprejudice against people who turn an all important wheel in themachinery of modern production, it must either be based on some populardelusion, or if there is any truth behind it, it must be due to the factthat the financiers do their work ill, or charge the community too muchfor it, or both. 

Before we can examine this interesting problem on its merits, we have toget over one nasty puddle that lies at the beginning of it. Much of theprejudice against financiers is based on, or connected with, anti-Semitic feeling, that miserable relic of medieval barbarism. Nocandid examination of the views current about finance and financiers canshirk the fact that the common prejudice against Jews is at the back ofthem; and the absurdity of this prejudice is a very fair measure of thevalidity of other current notions on the subject of financiers. The Jewsare, chiefly, and in general, what they have been made by the allegedChristianity of the so-called Christians among whom they have dwelt. Anobvious example of their treatment in the good old days, is given byAntonio's behaviour to Shylock. Antonio, of whom another character inthe _Merchant of Venice_ says that--

 "A kinder gentleman treads not the earth, "

not only makes no attempt to deny that he has spat on the wickedShylock, and called him cut-throat dog, but remarks that he is quitelikely to do so again. Such was the behaviour towards Jews of theprincely Venetian merchant, whom Shakespeare was portraying as a modelof all the virtues. [5] Compare also, for a more modern example, Kinglakein a note to Chapter V of "Eothen. "

 "The Jews of Smyrna are poor, and having little merchandize of their own to dispose of, they are sadly importunate in offering their services as intermediaries; their troublesome conduct had led to the custom of beating them in the open streets. It is usual for Europeans to carry long sticks with them, for the express purpose of keeping off the chosen people. I always felt ashamed to strike the poor fellows myself, but I confess to the amusement with which I witnessed the observance of this custom by other people. "

Originally, as we see from the Hebrew scriptures, a hardy race ofshepherds, farmers, and warriors, they were forced into the business offinance by the canonical law which forbade Christians to lend money atinterest, and also by the persecution, robbery and risk of banishment towhich Christian prejudice made them always liable. For these reasonsthey had to have their belongings in a form in which they could at anymoment be concealed from robbers, or packed up and carried off if theirowners suddenly found themselves told to quit their homes. So they werepractically compelled to traffic in coins and precious metals andjewellery, and in many places all other trades and professions wereexpressly forbidden to them. This traffic in coins and metals naturallyled to the business of moneylending and finance, and the centuries ofpractice, imposed on them by Christianity, have given them a skill inthis trade, which is now the envy of Christians who have in the meantimefound out that there is nothing wicked about moneylending, when it ishonestly done. At the same time these centuries of persecution havegiven the Jews other qualities which we have more reason to envy thantheir skill in finance, such as their strong family affection and thesteadfastness with which they stand by one another in all countries ofthe world. The fact of their being scattered over the face of the earthhas given them added strength since finance became international. Thegreat Jew houses have relations and connections in every businesscentre, and so their power has been welded, by centuries of racialprejudice, into a weapon the strength of which it is easy for popularimagination to exaggerate. Christendom forced the money power into thehands of this persecuted race, and now feels sorry when it sees that inan ordered and civilized society, in which it is no longer possible toroast an awkward creditor alive, money power is a formidable force. Thata large part of this power is in the hands of a family party, scatteredover all lands in which finance is possible, is another reason why, as Ihave already shown, international finance works for peace. The fact ofthe existence of the present war, however, shows that the limits of itspower are soon reached, at times when the nations believe that theirhonour and safety can only be assured by bloodshed. 

A large part of the popular prejudice against financiers may thus beascribed to anti-Semitic feeling. We are still like the sailor who wasfound beating a Jew as a protest against the Crucifixion, and, whentold that it had happened nearly two thousand years ago, said that hehad only heard of it that morning. 

But, when we have purged our minds of this stupid prejudice, we arestill faced by the fact that international finance is often an uncleanbusiness, bad both for the borrower and for the lender and profitableonly to a horde of parasites in the borrowing country, and to those whohandle the loan in the lending country, and get subscriptions to it frominvestors who are subsequently sorry that they put their eggs into abasket with no bottom to it. Under ideal conditions our money is lent byus, through a first-rate and honourable finance house, to a countrywhich makes honest use of it in developing its resources and increasingits power to make and grow things. The loan is taken out from England inthe shape of goods and services required for the equipment of a youngcountry, and the interest comes in every year in the shape of food andraw material that feeds us and helps our industry. Such, it may beasserted with confidence, is the usual course of events, and must havebeen so, or England could not have been so greatly enriched by hermoneylending operations abroad, and the productive power of the worldcould not have grown as it has, under the top-dressing that our financeand trade have given it. But though it is thus clear enough that thebusiness must have been on the whole honestly and soundly worked, therehave been some ugly stains on its past, and its recent history has notbeen quite free from unsavoury features. 

In 1875 public opinion was so deeply stirred by the manner in whichEnglish investors and borrowing states had suffered from the system bywhich the business of international finance was handled, that a SelectCommittee of the House of Commons was "appointed to inquire into thecircumstances attending the making of contracts for Loans with certainForeign States and also the causes which have led to the non-payment ofthe principal moneys and interest due in respect of such loans. " Itsreport is a very interesting document, well worth the attention of thoseinterested in the vagaries of human folly. It will astound the readerby reason of the wickedness of the waste of good capital involved, andat the same time it is a very pleasant proof of the progress that hasbeen made in finance during the last half century. It is almostincredible that such things should have happened so lately. It is quiteimpossible that they could happen now. 

In 1867 the Republic of Honduras had been for forty years in default onits portion, amounting to £27, 200, of a loan issued in London in 1825, for the Federal States of Central America. Nevertheless it contractedwith Messrs. B---- and G---- for a loan of £1, 000, 000 to be issued inParis and London. The loan was to be secured on a railway, to be built, or begun, out of its proceeds, and by a first mortgage on all thedomains and forests of the State. The Government undertook to pay£140, 000 annually for fifteen years, to meet interest on and redemptionof the loan. As it had been forty years in default on a loan which onlyinvolved a charge of £1632, it is hard to imagine how the State couldhave entered into such a liability, or how any issuing house could havehad the temerity to put it before the public. 

The public was the only party to the proceedings which showed any sense. Don C---- G----, representative of the Honduras Government in London, relates in the record of these events that he put before the Committee, that "the First Honduras Loan in spite of all the advantages which itoffered to subscribers" [issue price, 80, interest 10 per cent. , sinkingfund of 3 per cent, which would redeem the whole loan at par within 17years] "and the high respectability of the house which managed theoperation, was received by the public with perfect indifference, withprofound contempt; and according to the deficient and vague informationwhich reached the Legation, there were hardly any other subscriptionsthan one of about £10, 000 made by the firm of B----itself, " Don G----, however, seems to have slightly exaggerated the wisdom of the public; inany case the Committee found that by June 30, 1868, by some means£48, 000 of the loan was held by the public, and £952, 000 was inpossession of the representatives of the Honduras Government. On thatday a Mr. L---- undertook to take over the Government's holding at £6812s. Per bond, and pay current interest. A market was made, brokers wereprevailed on to interest their friends in the security, and in twoyears' time the bonds were disposed of. The quotation was skilfully keptabove the issue price and in November, 1868, it reached 94. 

The story of this loan is complicated by the fact that half of it was atthe time alleged to have been placed in Paris, but it appears, as far asone can disentangle fact from the twisted skein of the report, that theParis placing must have resulted much as did the first effort made inLondon, and that practically the whole of the bonds there issued cameback into the hands of the representatives of Honduras. 

At the end of the proceedings the whole amount of the loan seemed tohave been disposed of in London, £631, 000 having been sold to Mr. L----and passed on by him by the means described above, £200, 000 having beenissued to railway contractors, £10, 800 having been "drawn before issueand cancelled, " while £49, 500 was "issued in exchange for scrip, " and£108, 500 was taken on account of commission and expenses. 

The actual cash received on account of this loan appears, though theCommittee's figures are difficult to follow, to have come to just overhalf a million. Out of the half million £16, 850 went in cash commission, and £106, 000 in interest and sinking fund, leaving about £380, 000 forthe railway contractors and the Government. On this loan the Committeeobserves that the commission paid, of £108, 500 bonds, and £16, 850 incash was "greatly in excess of what is usually charged by contractorsfor loans. "

So far it was only a case of a thoroughly speculative transactioncarried through by means of the usual accompaniments. A defaulting Statebelieved to be possessed of great potential wealth, thought, or wasinduced to think, that by building a railway it could tap that wealth. The whole thing was a pure possibility. If the loan had beensuccessfully placed at the issue price it would have sufficed to buildthe first section (fifty-three miles) of railway, and to leave somethingover for work in the mahogany forests. It is barely possible that intime the railway might have enabled the Government to produce enoughstuff out of its forests to meet the charges of the loan. But thepossibility was so remote that the terms offered had to be so liberalthat they frightened the public, which happened to be in a sensiblemood, until it was induced to buy by the creation of a market on theStock Exchange; the employment of intermediaries on disastrous terms, and finally default, as soon as the loan charge could no longer be paidout of the proceeds of the loan, completed the tale. 

In May, 1869, the Minister for Honduras in Paris, M. H----, "took steps"to issue a loan for 62, 250, 060 francs, or £2, 490, 000. Out of it a smallsum (about £62, 000) was paid to the railway contractors in London, butlittle of it seems to have been genuinely placed, since, when theFranco-German war broke out in July, 1870, M. H---- sent 2, 500, 000francs in cash (£100, 000), and 39, 000, 000 francs in bonds, to Messrs. B---- and G---- in London. Messrs. B---- and others made an agreementwith Mr. C. L----, presumably the gentleman who had taken over anddealt with the unplaced balance of the First London Loan. By its termsthe net price to be paid by him for each 300 francs (£12) bond issuedoriginally at 225 francs (£9), was 124 francs (not quite £5). Hesucceeded in selling bonds enough to realize £408, 460, and he, togetherwith Messrs. B---- and G----, received £51, 852 in commission for sodoing. 

In the spring of 1870, the Honduras Government, still hankering afterits railway and the wealth that it was to open up, determined to tryagain with another loan. Something had to be done to encourage investorsto take it. A few days before the prospectus appeared a statement waspublished in a London newspaper to the effect that two ships had arrivedin the West India Docks from Truxillo (Honduras) with cargoes ofmahogany and fustic consigned to Messrs. B---- and G----on account ofthe Honduras Railway Loan, and that two others were loading at Truxillowith similar cargoes on the same account. These cargoes had not been cutby the Honduras Government. It had bought them from timber merchants, and they were found to be of most inferior quality. In the opinion ofthe Committee "the purchase of these cargoes and the announcement oftheir arrival in the form above referred to, were intended to induce, and did induce, the public to believe that the hypothecated forests wereproviding means for paying the interest upon the loan. "

With the help of this fraud, and with a free and extensive market madeon the Stock Exchange, the 1870 Honduras 10 per cent. Loan for£2, 500, 000 nominal was successfully issued at 80. It also had a sinkingfund of 3 per cent. , which was to pay it off in fifteen years. Mr. L----again handled the operation, having taken over the contract from Messrs. B---- and G----. But the success of the issue was more than hollow. Itwas empty. For Mr. L----, in the process of making the market to promoteit, had bought nearly the whole loan. Applicants had evidently soldnearly as fast as they applied; for on the 15th December, when the lastinstalment was to be paid, less than £200, 000 bonds remained in thehands of the public. Nevertheless by October, 1872, nearly the whole ofthe loan had been somehow disposed of to investors or speculators. Oneof the means taken to stimulate the demand for them was the announcementof extra drawings of bonds at par, over and above the operation of the 3per cent, sinking fund, provided by the prospectus. 

There is no need to linger over the complicated details of this sordidstory. The Committee's report sums up, as follows, the net results ofthe 1869 and 1870 loans of Honduras:--

"In tracing the disposal of the proceeds of the 1869 and 1870 loans, itmust be remembered that your Committee had no evidence before themrelating to the funds resulting from three-fifths of the loan of 1869;only two-fifths of the loan was realized in this country, the remainderwas disposed of in Paris before August, 1870, and no account of theapplication of the funds resulting from such portion of the loan couldbe obtained. 

"The two-fifths of the 1869 loan, and the whole of the loan of 1870, produced net £2, 051, 511; out of this sum only £145, 254 has been paid tothe railway contractors; a sum of £923, 184 would have been sufficient todischarge the interest and sinking fund in respect of the issued bondsof the three loans, yet the trustees ... Paid to Mr. L----£1, 339, 752 or£416, 568 beyond the sum so required to be paid upon the issued bonds ofthe loans. 

"There was paid to him for commissions (apart from expenses) on thethree loans, out of the above proceeds, the sum of £216, 852. He alsoreceived out of the same proceeds £41, 090, being the difference between£370, 000 cash paid to him by the trustees and £328, 910 scrip returned byhim to them. This £41, 090 probably represents the premiums paid on thepurchase of the scrip before or immediately after the allotment of theloan, and was certainly a misapplication of the proceeds of the loan. 

"Mr. L---- was also paid, out of these proceeds, a further sum of£57, 318, nearly the whole of which seems to be a payment in discharge ofan allowance of £8 per bond in respect of the dealings in the 1867loan.... In addition ... It will be remembered that Mr. L---- received£50, 000 'to maintain the credit of Honduras. '

"He also on the 18th of June, 1872, obtained £173, 570 by delivering tothe trustees ... 5042 bonds of the 1870 loan, at £75 Per bond and 33, 000bonds of the 1869 loan at 104 francs per bond, and retaking them at thesame time from the trustees at £50 and 104 francs per bond respectively. Mr. L---- had contracted to pay for these bonds and they had been issuedto him at the prices of £75 and 104 francs respectively, and theremission in the price therefore amounted to a gift to him of £173, 570... Out of this portion of the loan of 1869, and the loan of 1870, Mr. L----has received in cash, or by the remission of his contracts, £955, 398. "

It is little wonder that Honduras has been in default on these loansever since. In its Report the Committee commented severely on the actionof Don C---- G----, the London representative of the Republic. "Hesanctioned, " it says, "Stock Exchange dealings and speculations in theloans which no Minister should have sanctioned. He was a party to thepurchase of the mahogany cargoes, and permitted the public to be misledby the announcements in relation to them. By express contract heauthorized the 'additional drawings. ' He assisted Mr. L---- toappropriate to himself large sums out of the proceeds of the loans towhich he was not entitled. " Very likely he had not a notion as to whatthe whole thing meant, and only thought that he was doing his best tofinance his country along the road to wealth. But the fact remains thatby these actions he made his Government a party to the proceedings thatwere so unfortunate for it and so ruinous to the holders of its bonds. 

After its examination of these and other less sensational but equallydisastrous issues the Committee made various recommendations, chiefly inthe direction of greater publicity in prospectuses, and ended byexpressing their conviction that "the best security against therecurrence of such evils as they have above described will be found, not so much in legislative enactments, as in the enlightenment of thepublic as to their real nature and origin. "

If the scandals and losses involved by loan issues were always on thisGargantuan scale, there would be little difficulty about disposing ofthem, both on economic and moral grounds, and showing that there is, andcan be, only one side to the problem. But when it is only a question, not of fraud on a great scale but of a certain amount of underhandbusiness, such as is quite usual in some latitudes, and a certain amountof doubt as to the use that is likely to be made by the borrower of themoney placed at its disposal, it is not so easy to feel sure about theduty of an issuing house in handling foreign loans. At a point, in fact, the question becomes full of subtleties and casuistical difficulties. 

For instance, let us suppose that an emissary of the Republic ofBarataria approaches a London issuing house and intimates that it wantsa loan for 3 millions sterling, to be spent half in increasing theRepublic's navy, and half in covering a deficit in its Budget, and thathe, the said emissary, has full power to treat for the loan, and that acommission of 2 per cent. Is to be paid to him by the issuing house, which can have the loan at a price that will easily enable it to paythis commission. That is to say, we will suppose that the Republic willtake 85 for the price of its bonds, which are to carry 5 per cent. Interest, to be secured by a lien on the customs receipts, and to beredeemed in thirty years' time by a cumulative Sinking Fund working byannual drawings at par, or by purchase in the market if the bonds can bebought below par. If the Republic's existing 5 per cent. Bonds stand, let us say, at 98 in the market, this gives the issuing house a goodprospect of being able to sell the new ones easily at 95, and so it hasa 10 per cent. Margin out of which to pay stamps, underwriting and otherexpenses, and commission to the intermediary who brought the proposal, and to keep a big profit to themselves. From the point of view of theirown immediate interest there is every reason why they should close withthe bargain, especially if we assume that the Republic is fairly richand prosperous, and that there is little fear that its creditors willbe left in the lurch by default. 

From the point of view of national interest there is also much to besaid for concluding the transaction. We may, with very good ground, assume that it would also be intimated to the issuing house that a groupof Continental financiers was very willing to take the business up, thatit had only been offered to it owing to old standing relations betweenit and the Republic, and that, if it did not wish to do the business, the loan would readily be raised in Paris or Berlin. By refusing, theLondon firm would thus prevent all the profit made by the operation fromcoming to England instead of to a foreign centre. But there is much morebehind. For we have seen that finance and trade go hand-in-hand, andthat when loan-houses in the City make advances to foreign countries, the hives of industry in the North are likely to be busy. It has notbeen usual here to make any express stipulation to the effect that themoney, or part of it, raised by a loan is to be spent in England, but itis clear that when a nation borrows in England it is therebypredisposed to giving orders to English industry for goods that itproposes to buy. And even if it does not do so, the mere fact thatEngland promises, by making the loan, to hand over so much money, ineffect obliges her to sell goods or services valued at that amount aswas shown on an earlier page. [6] On the Continent, this stipulation isusual. So that the issuing house would know that, if they make the loan, it is likely that English shipbuilders will get the orders on which partof it is to be spent, and that in any case English industry in one formor another will be drawn on to supply goods or services to somebody;whereas if they refuse the business it is certain that the industrialwork involved will be lost to England. 

On the other side of the account there are plenty of good reasonsagainst the business. In the first place the terms offered are soonerous to the borrower that it may safely be said that no respectableissuing house in London would look at them. In effect the Republicwould be paying nearly 6 per cent, on the money, if it sold its 5 percent. Bonds at 85, and the state of its credit, as expressed by theprice of its bonds in the market, would not justify such a rate. Theprofit offered to the issuing house is too big, and the commissiondemanded by the intermediary is so large that it plainly points to evilpractices in Barataria. It means that interested parties have madeunderhand arrangements with the Finance Minister, and that the Republicis going to be plundered, not in the fine full-flavoured style thatruled in earlier generations, but to an extent that makes the businesstoo disreputable to handle. Any honourable English house would considerthat the terms offered to itself and the conditions proposed by theemissary were such that the operation was suspicious, and that beingmixed up with suspicious business was a luxury that it preferred toleave alone. 

On other grounds the loan, well secured as it seems to be, is not of akind to be encouraged. We have supposed its purpose to be, firstly, tomeet a deficit in a Budget, and secondly, to pay for naval expansion. Neither of these objects is going to improve the financial position ofthe Republic. Covering a deficit by loan is bad finance in any case, butespecially so when the loan is raised abroad. In the latter case it ismost likely that the borrowing State is outrunning the constable, byimporting more goods than it can pay for out of current production. 

If it imports for the purpose of increasing its productive power bybuying such things as railway material, then it is making a perfectlylegitimate use of its credit, as long as the money is well spent, andthe railways are honestly built, with a prospect of opening up goodcountry, and are not put into the wrong place for political or otherreasons. But if this were so, the money would not be wanted to balance aBudget, but on railway capital account. When a balance has to be filledby borrowing it can only mean that the State has spent more than itsrevenue from taxes permits, and that it is afraid to cut down itsexpenses by retrenchment or to increase its revenue by taxing morehighly. And so it chooses the primrose path of dalliance with amoneylender. 

As to naval expenditure, here again we have bad finance writ large overthe proposal. It is not good business for countries to borrow in orderto increase their armies and navies in time of peace, and the practiceis especially objectionable when the loan is raised abroad. In time ofwar, when expenditure has to be so great and so rapid, that thetaxpayers could not be expected to have it all taken out of theirpockets by the tax-gatherer, there is some excuse for borrowing fornaval and military needs; though even in time of war, if we couldimagine an ideal State, with every citizen truly patriotic, and properlyeducated in economics and finance, and with wealth so fairly distributedand taxation so fairly imposed that there would be no possibility of anyfeeling of grievance and irritation among any class of taxpayers, itwould probably decide that the simplest and most honest way of financingwar is to do so wholly out of taxation. In time of peace, borrowing forexpenditure on defence simply means that the cost of a need of to-day ismet by someone who is hired to meet it, by a promise of interest andrepayment, the provision of which is passed on to the citizens ofto-morrow. It is always urged, of course, that the citizens of to-morroware as deeply interested in the defence of the realm that they are toinherit as those of to-day, but that argument ignores the obvious factthat to-morrow will bring its own problems of defence with it, whichseem likely to be at least as costly as those of the present day. Another objection to lending economically backward countries money to beinvested in ships, is that we thereby encourage them to engage inshipbuilding rivalry, and to join in that race for aggressive powerwhich has laid so sore a burden on the older peoples. The business isalso complicated by the unpleasant activities of the armament firms ofall countries, which are said to expend much ingenuity in inducing theGovernments of the backward peoples to indulge in the luxury ofbattleships. Here, again, there is no need to paint too lurid a picture. The armament firms are manufacturers with an article to sell, which isimportant to the existence of any nation with a seaboard; and they areentirely justified in legitimate endeavours to push their wares. Thefact that the armament firms of England, Germany, and France had certaininterests in common, is often used as a text for sermons on the subjectof the unpatriotic cynicism of international finance. It is easy topaint them as a ring of cold-blooded devils trying to stimulatebloodthirsty feeling between the nations so that there may be a goodmarket for weapons of destruction. From their point of view, they areproviders of engines of defence which they make, in the first place, forthe use of their own country, and are ready to supply also, in time ofpeace, to other nations in order that their plant may be kept running, and the cost of production may be kept low. This is one of the matterson which public opinion may have something to say when the war is over. In the meantime it may be noted that unsavoury scandals haveoccasionally arisen in connection with the placing of battleship orders, and that this is another reason why a loan to finance them is likely tohave an unpleasant flavour in the nostrils of the fastidious. 

But if we admit the very worst that the most searching critic ofinternational finance can allege against the proposal that we imagine tobe put forward by the Republic of Barataria--if we admit that a loan tobalance a deficit and pay for ships probably implies wastefulness, corruption, political rottenness, impecunious Chauvinism and all therest of it, the question still arises whether it is the business of anissuing house to refuse the chance of doing good business for itself andfor the London money-market, because it has reason to believe that themoney lent will not be well spent. In the case supposed, we have seenthat the terms offered and the commission to be made by the intermediarywere such that the latter would have been shown the door. But if thesematters had been satisfactory, ought the proposal to have been rejectedbecause the loan was to be raised for unproductive purposes?

In other words, is it the business of an issuing house to take care ofthe economic morals of its clients, or is it merely concerned to seethat the securities which it offers to the public are well secured? Inordinary life, and in the relations between moneylender and borrower athome, no such question could be asked. If I went to my banker and askedfor a loan and gave him security that he thought good enough, it wouldnot occur to him to ask what I was going to do with the money--whether Iwas going to use it in a way that would increase my earning capacity, oron building myself a billiard room and a conservatory, or on a visit toMonte Carlo. He would only be concerned with making sure that any of hisdepositors' money that he lent to me would be repaid in due course, andthe manner in which I used or abused the funds lent to me would be aquestion in which I only was concerned. If it is the business of aninternational finance house to be more careful about the use to whichmoney that it lends on behalf of clients is put, why should this be so?

There are several reasons. First, because if the borrower does not seefit to pay interest on the loan or repay it when it falls due, there isno process of law by which the lender can recover. If I borrow from mybanker and then default on my debt, he can put me in the bankruptcycourt, and sell me up. Probably he will have protected himself bymaking me pledge securities that he can seize if I do not pay, asafeguard which cannot be had in the case of international borrowing;but if these securities are found to be of too little value to make thedebt good, everything else that I own can be attached by him. Theinternational moneylender, on the other hand, if his debtor defaultsmay, if he is lucky, induce his Government to bring diplomatic pressureto bear, for whatever that may be worth. If there is a political purposeto be served, as in Egypt, he may even find himself used as an excusefor armed intervention, in the course of which his claims will besupported, and made good. In many cases, however, he and the bondholderswho subscribed to his issue simply have to say goodbye to their money, with the best grace that they can muster, in the absence of any law bywhich a lender can recover moneys advanced to a sovereign State. Withthis essential difference in the conditions under which a banker lendshis depositors' money to a local customer, and those under which aninternational house lends its clients' money to a borrowing country, itfollows that the responsible party in the latter case ought to exercisevery much more care to see that the money is well spent. 

In the second place, the customers to whom bankers, in economicallycivilized lands, lend the money entrusted to them, may fairly bepresumed to know something about the use and abuse of money and to beable to take care of themselves. If they borrow money, and then waste itor spend it in riotous living, they know that they will presentlyimpoverish themselves, and that they will be the sufferers. But in thecase of a young country, with all its financial experience yet unbought, there is little or no reason for supposing that its rulers are awarethat they cannot eat their cake and have it. They probably think that byborrowing to meet a deficit or to build a Dreadnought they are doingsomething quite clever, dipping their hands into a horn of plenty that akindly Providence has designed for their behoof, and that the loan willsomehow, some day, get itself paid without any trouble to anybody. Moreover, if they are troubled with any forebodings, the voice of commonsense is likely to be hushed by the reflection that they personallywill not be the sufferers, but the great body of taxpayers, or in thecase of actual default, the deluded bondholders; and that in any case, the trouble caused by over-borrowing and bad spending is not likely tocome to a head for some years. Its first effect is a flush of fictitiousprosperity which makes everybody happy and enhances the reputation ofthe ministers who have arranged it. When, years after, the evil seedsown has brought to light its crops of tares, it is very unlikely thatthe chain of cause and effect will be recognized by its victims, who aremuch more likely to lay the bad harvest to the door not of the badfinancier who sowed it, but of some innocent and perhaps wholly virtuoussuccessor, merely because it was during his term of office that the cropwas garnered. So many are the inducements offered to young States, withignorant or evil (or both) rulers at their head, to abuse the facilitiesgiven them by international finance, that there is all the more reasonwhy those who hold the strings of its purse should exercise very greatcaution in allowing them to dip into it. 

There is yet another reason why the attitude of an issuing house, to aborrowing State, should be paternal or even grand-motherly, as comparedwith the purely business-like attitude of a banker to a local borrower. If the bank makes a bad debt, it has to make it good to its depositorsat the expense of its shareholders. It diminishes the amount that can bepaid in dividends and so the bank is actually out of pocket. Theinternational financier is in quite a different position. If he arrangesa loan for Barataria, he takes his profit on the transaction, sells thebonds to investors, or to the underwriters if investors do not apply, and is, from the purely business point of view, quit of the wholeoperation. He still remains responsible for receiving from the State, and paying to the bondholders, the sum due each half year in interest, and for seeing to the redemption of the bonds by the operation of theSinking Fund, if any. But if anything goes wrong with the interest orSinking Fund he is not liable to the bondholders, as the bank is liableto its depositors. They have got their bonds, and if the bonds are indefault they have made a bad debt and not the issuing house, unless, asis unlikely, it has kept any of them in its own hands. 

But this absence of any legal liability on the part of the issuing houseimposes on it a very strong moral obligation, which is fully recognizedby the best of them. Just because the bondholders have no right ofaction against it, unless it can be shown that it issued a prospectuscontaining incorrect statements, it is all the more bound to see thattheir money shall not be imperilled by any action of its own. It knowsthat a firm with a good reputation as an international finance house hasonly to put its name to an issue, and a large number of investors, whohave neither the education nor the knowledge required to form a judgmenton its merits, will send in subscriptions for the bonds on the strengthof the name of the issuing house. This fact makes it an obvious duty onthe part of the latter to see that this trust is deserved. Moreover, itwould obviously be bad business on their part to neglect this duty. Fora good reputation as an issuing house takes years to build up, and isvery easily shaken by any mistake, or even by any accident, which couldnot have been foreseen but yet brings a loan that it has handled intothe list of doubtful payers. Mr. Brailsford, indeed, asserts that it maybe to the advantage of bondholders to be faced by default on the part oftheir debtors. It may be so in those rare cases in which they can getreparation and increased security, as in the case of our seizure ofEgypt. But in nine cases out of ten, as is shown by the plaintive storytold by the yearly reports of the Council of Foreign Bondholders, default means loss and a shock to confidence, even if only temporary, and is generally followed by a composition involving a permanentreduction in debt and interest. Investors who have suffered theseunpleasantnesses are likely to remember them for many a long year, andto remember also the name of the issuing house which fathered the loanthat was the cause of the trouble. 

There are thus many good reasons why it is the business of a carefulissuing firm to see not only that any loan that it offers is wellsecured, but also that it is to be spent on objects that will notimpair the productive capacity of the borrowing country by leading itdown the path of extravagance, but will improve it by developing itsresources or increasing its power to move its products. On the otherhand, the temptation to undertake bad business on behalf of animportunate borrower is great. The profits are considerable for theissuing house and for all their followers in the City. The indirectadvantages, in the way of trade orders, conferred on the lendingcountry, are also profitable, and there is always the fear that ifLondon firms take too austere a view of what is good business for themand the borrowing countries, the more accommodating loan-mongers offoreign centres may reap the benefit, and leave them with empty pocketsand the somewhat chilly comfort conferred by the consciousness of a highideal in finance. 

One of the most unsatisfactory features about the monetary arrangementsof society, as at present constituted, is the fact that the reward ofeffort is so often greater with every degree of evil involved by theeffort. And to some extent this is true in finance. Just as bigfortunes are made by the cheap-jacks who stuff the stomachs of anignorant public with patent medicines, while doctors slave patiently fora pittance on the unsavoury task of keeping overfed people in health;just as Milton got £5 for "Paradise Lost, " while certain modernnovelists are rewarded with thousands of pounds for writing romanceswhich would never be printed in a really educated community; so infinance the more questionable--up to a certain point--be the security tobe handled, the greater are the profits of the issuing house, the largerthe commissions of the underwriters and brokers, and the larger are theamounts paid to the newspapers for advertising. As has already beenobserved, that part of the City that lives on handling new issues hasbeen half starved since the war began, because its activities have beenpractically confined to loans issued by the British Government. Theseloans have been huge in amount but there has been no underwriting, andbrokerages are cut to the bone. Advertising for the second War Loan wason a great scale, but in proportion to the amount subscribed the costof it was probably small, according to the ideals that ruled before thewar. A Colonial loan, or a first-class American railroad bond, almostplaces itself, and the profits on the issue to all who handle it areproportionately low. The more questionable the security, the more it hasto pay for its footing, and the higher are the profits of those whofather it and assist the process of delivery, as long, that is, as thebirth is successfully accomplished. 

If there is failure, partial or complete, then the task of holding thebaby is longer and more uncomfortable, the more puny and unattractive itis. If, owing to some accident in the monetary atmosphere, a Colonialloan does not go off well, the underwriters who find themselves saddledwith it, can easily borrow on it, in normal times, and know that sooneror later trustees and other real investors will take it off their hands. But if it is an issue of some minor European power, or of some not tooopulent South American State, that is coldly received by the investingpublic, bankers will want a big margin before they accept it assecurity for an advance, and it may take years to find a home for it inthe strong boxes of real investors, and then perhaps only at a pricethat will leave the underwriters, like Sir Andrew Aguecheek, "a foul wayout. " There is thus a logical reason for the higher profits attached tothe more questionable issues, and this reason is found in the greaterrisk attached, if failure should ensue. 

Thus we arrive at the reply to those who criticize International Financeon the ground that it puts too big profits into the pockets of those whohandle it. If the profits are big, it is only in the case of loan issueswhich carry with them a considerable risk to the reputation of thefathering firm, and to the pockets of the underwriters, and involve aresponsibility, and in the case of default, an amount of wholly unpaidwork and anxiety for which the big profits made on the openingproceedings do not nearly compensate. As in the case of the big gainsmade by patent pill merchants, and bad novelists, it is the public, which is so fond of grumbling because other people make fortunes out ofit, that is really responsible for their doing so, by reason of its owngreed and stupidity. Because it will not take the trouble to find outhow to spend or invest its money, it asks those who are clever enough tobatten on its foibles, to sell it bad stuff and bad securities, and thenfeels hurt because it has a pain in its inside, or a worthless bond atits banker's, while the producers thereof are founding county families. If the public would learn the A B C of investment, and also learn thatthere is an essential difference between investment and speculation, that they will not blend easily but are likely to spoil one another ifone tries to mix them, then the whole business of loan issuing andcompany promotion would be on a sounder basis, with less risk to thosewho handle it, and less temptation to them to try for big profits out ofbad ventures. But as long as

 "the fool multitude that choose by show"

give more attention to the size of an advertisement than to the meritsof the security that it offers, the profits of those who cater for itsweaknesses will wax fat. 

When all has been said that can be urged against the record ofinternational finance, the fact remains that from the purely materialpoint of view it has done a great work in increasing the wealth ofmankind. It is true that capital has often been wasted by being lent tocorrupt or improvident borrowers for purposes which were eitherobjectionable in themselves, or which ought to have been financed, if atall, out of current revenue. It is true, also, that crimes have beencommitted, as in the case of the Putumayo horrors, when the money ofEnglish shareholders has been invested in the exploitation of helplessnatives, accompanied by circumstances of atrocious barbarity. Nevertheless if we compare the record of finance with that of religionor international politics, it stands out as by far the cleanest of theinfluences that have worked upon the mutual relations of the variousgroups of mankind. International Finance makes a series of bargainsbetween one nation and another, for the mutual benefit of each, complicated by occasional blunders, some robbery, and, in exceptionalcases, horrible brutality. Religion has stained history with the mostruthless massacres, and the most unspeakable ingenuity in torture, alldevised for the glory of God, and the furtherance of what its devoteesbelieved to be His word. International politics have plunged mankindinto a series of bloody and destructive wars, culminating in the presentcataclysm. Finance can only prosper through production; its efforts areinevitably failures, if they do not tend to the growing and making ofthings, or the production of services, that are wanted. Destruction, reduced to a fine art and embellished by the nicest ingenuities of themost carefully applied science, is the weapon of international politics. 

 _Note_. --The names of the actors in the Honduras drama were printed in blank because it seemed unfair to do otherwise, in revising fifty years' old scandals, as an example of what International Finance can do at its worst. 

FOOTNOTES:

[Footnote 5: _Merchant of Venice_, I, 3. ]

[Footnote 6: Pages 75, 76. (NOTE: See Chapter IV, "In the beginnings of international trade... ")]

CHAPTER VII

NATIONALISM AND FINANCE

So far we have considered the working of International Finance chieflyfrom the point of view of its effects upon the prosperity and comfort ofmankind as a whole and on this country, as the greatest trader, carrier, and financier of the world. We have seen that the benefit that it worksis wrought chiefly through specialization, that is, through theproduction of the good things of the earth in the lands best fitted, byclimate or otherwise, to grow and make them. By lending money to otherlands, and the goods and service that they have bought with it, we havehelped them to produce things for us to consume, or to work up intoother things for our consumption or that of other peoples. Thereby wehave enriched ourselves and the rest of mankind. But the question stillarises whether this process is one that should be left altogetherunchecked, or whether it involves evils which go far to modify itsbenefits. In other words is it a good thing for us, socially andpolitically, to enrich ourselves beyond a certain point by a processwhich involves our dependence on other countries for food and rawmaterial?

Analogy between a State and a man is often useful, if not pushed toofar. The original man in a primitive state is always assumed to havebeen bound to find or make everything that he wanted by his ownexertions. He was hut builder, hunter, cultivator, bow-maker, arrow-maker, trapper, fisherman, boat-builder, leather-dresser, tailor, fighter--a wonderfully versatile and self-sufficient person. As theprocess grew up of specialization, and the exchange of goods andservices, all the things that were needed by man were made much betterand more cheaply, but this was only brought about at the expense of eachman's versatility. Nowadays we can all of us do something very muchbetter than the primitive savage, but we cannot do everything nearly aswell. We have become little insignificant wheels in a mighty greatmachine that feeds us and clothes us and provides us with comforts andluxuries of which he could never have dreamt. He was the whole of hismachine, and was thereby a far more completely developed man. The modernmillionaire, in spite of his enormous indirect power over the forces ofnature, is a puny and ineffective being by the side of his savageancestor, in the matter of power to take care of himself with his ownhands and feet and eyes, and with weapons made by his own ingenuity andcunning. Moreover, though in the case of the millionaire and of all thecomparatively well-to-do classes we can point to great intellectual andartistic advantages, and many pleasant amenities of life now enjoyed bythem, thanks to the process of specialization, these advantages can onlybe enjoyed to the full by comparatively few. To the majorityspecialization has brought a life of mechanical and monotonous toil, with little or none of the pride in a job well done, such as was enjoyedby the savage when he had made his bow or caught his fish; those whowork all day on some minute process necessary, among many others, tothe turning out of a pin, can never feel the full joy of achievementsuch as is gained by a man who has made the whole of anything. Pins aremade much faster, but some of the men who make them remain machines, andnever become men at all in the real sense of the word. And when at thesame time the circumstances of their lives, apart from their work, areall that they should not be--bad food, bad clothes, bad education, badhouses, foul atmosphere and dingy and sordid surroundings, it is veryobvious that to a large part of working mankind, the benefits of themuch vaunted division of labour have been accompanied by very seriousdrawbacks. The best that can be said is that if it had not been for thedivision of labour a large number of them could never have come intoexistence at all; and the question remains whether any sort of existenceis better than none. 

In the case of a nation the process of specialization has not, forobvious reasons, gone nearly so far. Every country does a certain amountof farming and of seafaring (if it has a seaboard), and ofmanufacturing. But the tendency has been towards increasingspecialization, and the last results of specialization, if carried toits logical end, are not nice to forecast. "It is not pleasant, " wrote adistinguished statistician, "to contemplate England as one vast factory, an enlarged Manchester, manufacturing in semi-darkness, continual uproarand at an intense pressure for the rest of the world. Nor would thecontinent of America, divided into square, numbered fields, andcultivated from a central station by electricity, be an ennoblingspectacle. "[7]

It need not be said that the horrible consequences of specializationdepicted by Dr. Bowley need not necessarily have happened, even if itseffects has been given free play. But the interesting point about hispicture, at the present moment, is the fact that it was drawn from thepurely economic and social point of view. He questioned whether it wasreally to the advantage of a nation, regarding only its own comfort andwell-being, to allow specialization to go beyond a certain point. Ithad already arrived at a point at which land was going out ofcultivation in England, and was being more and more regarded as a park, pleasure ground and sporting place for people who made, or whoseforbears had made, fortunes out of commerce and finance, and less andless as a means for supplying food for our workers, and raw material forour industries. The country workers were going to the new countries thatour capital was opening up, or into the towns to learn industrialcrafts, or taking services as gamekeepers, grooms or chauffeurs, withthe well-to-do classes who earned their profits from industry orbusiness. Even before the war there was a growing scarcity of labour togrow, and harvest, even the lessened volume of our agricultural output. Dr. Bowley's picture was far from being realized and even if the processof specialization had gone on, it may be hoped that we should have hadsense enough to avoid the blackest of its horrors. 

Then came the war, which went far to undermine the great underlyingassumption on which the free interchange of capital among nations andthe consequent specialization that proceeded from it, was taken to be asafe and sound policy. This assumption was in effect, that the world wascivilized to a point at which there was no need to fear that its wholeeconomic arrangements would be upset by war. We now know that the worldwas not civilized to this point, and is a very long way from being so, that the ultimate appeal is still to "arms and the man, " and that wehave still to be careful to see that our trade and industry are carriedon in such a way as to be least likely to be hurt if ploughshares havesuddenly to be beaten into swords. At first sight, this is a somewhattragical discovery, but it carries with it certain consolations. If theapparent civilization evolved by the nineteenth century had been goodand wholesome, it might have been really sad to find that it was only athin veneer laid over a structure that man's primitive passions might atany moment overturn. In fact, the apparently achieved civilization wasso grossly material in its successes, so forcibly feeble in itsfailures, so beset with vulgarity at its summit and undermined bydestitution at its base, that even the horrors of the present war, withits appalling loss of the best lives of the chief nations of the earth, may be a blessing to mankind in the long run if they purge its notionsabout the things that are worth trying for. 

At least the war is teaching us that the wealth of a nation is not apile of commodities to be frittered away in vulgar ostentation andstupid self-indulgence, but the number of its citizens who are able andready to play the man as workers or fighters when a time of trial comes. "National prosperity, " says Cobbett, "shows itself ... In the plentifulmeal, the comfortable dwelling, the decent furniture and dress, thehealthy and happy countenances, and the good morals of the labouringclasses of the people. " So he wrote, in Newgate gaol, in 1810. [8] Sincethen many reformers have preached the same sound doctrine, but itsapplication has made poor progress, in relation to the growth of ourriches in the same period. If we now decide to put it into practice, weshall not long tolerate the existence in our midst of disease anddestitution, and a system of distribution of the world's goods whichgives millions of our population no chance of full development. 

We need not, then, stay to shed tears over the civilization, such as itwas, which we thought we had and had not. Its good points will endure, for evil has a comfortable habit of killing itself and those who workit. All that we are concerned with at this moment is the fact that itsdownfall has shaken an article in our economic faith which taught usthat specialization was a cause of so much more good than evil, that itsdevelopment by the free spreading of our capital all over the world, wherever the demand for it gave most profit to the owner, was a tendencyto be encouraged, or at least to be left free to work out its will. Thiswas true enough to be a platitude as long as we could rely on peace. Ourcapital went forth and fertilized the world, and out of its growingproduce the world enriched us. As the world developed its productivepower, its goods poured into us, as the great free mart where all menwere welcome to sell their wares. These goods came in exchange for ourgoods and services, and the more we bought the more we sold. When othernations took to dealing direct with one another, they wanted our capitalto finance the business, and our ships to carry the goods. The world asa whole could not grow in wealth without enriching the people that wasthe greatest buyer and seller, the greatest moneylender and the greatestcarrier. It was all quite sound, apart from the danger depicted by Dr. Bowley, as long as we had peace, or as long as the wars that happenedwere sufficiently restricted in their area and effect. But now we haveseen that war may happen on such a scale as to make the interchange ofproducts between nations a source of grave weakness to those whopractise it, if it means that they are thereby in danger of findingthemselves at war with the providers of things that they need forsubsistence or for defence. 

Another lesson that the war has taught us is that modern warfareenormously increases the cost of carriage by sea, because it shuts up inneutral harbours the merchant ships of the powers that are weaker onthe sea, and makes huge calls, for transport purposes, on those of thepowers which are in the ascendant on the water. This increase in thecost of sea carriage adds to the cost of all goods that come by sea, andis a particularly important item in the bill that we, as an islandpeople, have to pay for the luxury of war. It is true that much of thehigh price of freight goes into the pockets of our shipowners, but they, being busy with transport work for the Government, cannot take nearly somuch advantage of it as the shipmasters of neutral countries. 

The economic argument, then, that it pays best to make and grow thingswhere they can best be made and grown remains just as true as ever itwas, but it has been complicated by a political objection that if onehappens to go to war with a nation that has supplied raw material, orhalf-raw material, for industries that are essential to our commercialif not to our actual existence, the good profits made in time of peaceare likely to be wiped out, or worse, by the extent of the inconvenienceand paralysis that this dependence brings with it in time of war. Andeven if we are not at war with our providers, the greater danger andcost of carriage by sea, when war is afoot, makes us question theadvantage of the process, for example, by which we have developed aforeign dairying industry with our capital, and learnt to depend on itfor a large part of our supply of eggs and butter, while at home we haveseen a great magnate lay waste farms in order to make fruitful land intoa wilderness for himself and his deer. It may have paid us to let thisbe done if we were sure of peace, but now that we have seen what modernwarfare means, when it breaks out on a big scale, we may surely begin tothink that people who make bracken grow in place of wheat, in order toimprove what auctioneers call the amenities of their rural residences, are putting their personal gratification first in a question which is ofnational importance. 

We may seem to have strayed far from the problems of InternationalFinance and the free interchange of capital between countries, but infact we are in the very middle of them, because they are so complicatedand diverse that they affect nearly every aspect of our national lives. By sending capital abroad we make other countries produce for us and sowe help a tendency by which we grow less at home, and export coupons, ordemands for interest, instead of the present produce of our brains andmuscles; and we do much more than that, for we thereby encourage thebest of our workers to leave our shores and seek their fortunes in thenew lands which our capital opens up. When we export capital it goes inthe shape of goods and services, and it is followed by an export of men, who go to lands where land is plentiful and cheap, and men are scarceand well paid. This process again was sound enough from the purelyeconomic point of view. It quickened the growth of the world's wealth byputting men of enterprise in places where their work was most handsomelyrewarded, and their lives were unhampered by the many bars to successthat remnants of feudalism and social restrictions put in their way inold countries; and it cleared the home labour market and so helped theworkers in their uphill struggle for better conditions and a chance ofa real life. But when the guns begin to shoot, the question must arisewhether we were wise in leaving the export of capital, which has suchgreat and complicated effects, entirely to the influence of the higglingof the market, and the price offered by the highest bidder. 

Much will evidently depend on the way in which the present war ends. Ifit should prove to be, as so many hoped at its beginning, a "war to endwar, " and should be followed by a peace so well and truly founded thatwe need have no fear for its destruction, then there will be much to besaid for leaving economic forces to work themselves out by economicmeans, subject to any checks that their social effects may makenecessary. But if, as seems to be probable, the war ends in a way thatmakes other such wars quite possible, when we have all recovered fromthe exhaustion and disgust produced by the present one, then politicalexpediency may overrule economic advantage, and we may find it necessaryto consider the policy of restricting the export of British capital tocountries with which there is no chance of our ever being at war, andespecially to our own Dominions oversea, not necessarily by prohibitionsand hard and fast rules, but rather by seeing that the countries towhich it is desirable for our capital to go may have some advantage whenthey appeal for it. 

This advantage our own colonial Dominions already possess, both from thesentiment of investors, which is a strong influence in their favour, andwill be stronger than ever after the war, and from legal enactment whichallows trustees to invest trust funds in their loans. Probably thesafest course would be to leave sentiment to settle the matter, and prayto Providence to give us sensible sentiments. Actual restraints on theexport of capital would be very difficult to enforce, for capital is anelusive commodity that cannot be stopped at the Customs houses. If welent money to a friendly nation, and our friend was thereby enabled tolend to a likely foe, we should not have mended matters. The time is notyet ripe for a full discussion of this difficult and complicatedquestion, and it is above all important that we should not jump tohasty conclusions about it while under the influence of the feverishstate of mind produced by war. The war has shown us that our wealth wasa sure and trusty weapon, and much of the strength of this weapon we oweto our activity in International Finance. 

FOOTNOTES:

[Footnote 7: "England's Foreign Trade in the Nineteenth Century, " p, 16, by Dr. A. L. Bowley. ]

[Footnote 8: "Paper against Gold, " Letter III. ]

CHAPTER VIII

REMEDIES AND REGULATIONS

Apart from the political measures which may be found necessary for theregulation, after the war, of International Finance, it remains toconsider what can be done to amend the evils from which it suffers, andlikewise what, if anything, can be done to strengthen our financialweapon, and sharpen its edge to help us in the difficult fight that willfollow the present war, however it may end. 

It has been shown in a previous chapter that the real weaknesses in thesystem of International Finance arise from the bad use made of itsfacilities by improvident and corrupt borrowers, and from the biggerprofits attached, in the case of success, to the more questionable kindsof issues. With regard to the latter point it was also shown that thesebigger profits may be, to a great extent, justified by the fact thatthe risk involved is much greater; since in the case of failure a weaksecurity is much more difficult to finance and find a home for than agood one. It may further be asked why weak securities should be broughtout at all and whether it is not the business of financial experts tosee that nothing but the most water-tight issues are offered to thepublic. Such a question evidently answers itself, for if only thoseborrowers were allowed to come into the market whose credit was beyonddoubt, the growth of young communities and of budding enterprises wouldbe strangled and the forward movement of material progress would beseriously checked. 

It is sometimes contended that much more might be done by the StockExchange Committee in taking measures to see that the securities towhich it grants quotations and settlements are soundly based. If thisview is to prevail, its victory has been greatly helped by the events ofthe war, during which the Stock Exchange has seen itself regulated andcontrolled by outside authority to such an extent that it would be muchreadier than it was two years ago to submit to regulations imposed onit by its own Committee at the bidding of the Government. Nevertheless, there is this great difficulty, that as soon as the Stock Exchangebegins to impose other than merely formal rules upon the issue ofsecurities under its authority, the public very naturally comes to theconclusion that all securities brought out under its sanction may berelied on as absolutely secure; and since it is wholly impossible thatthe Committee's regulations could be so strict as to ensure this resultwithout imposing limits that would have the effect of smotheringenterprise, the effect of any such attempt would be to encourage thepublic to pursue a happy-go-lucky system of investing, and then to blamethe Stock Exchange if ever it found that it had made a mistake and hadindulged in speculation when it flattered itself that it was investing. The whole question bristles with difficulties, but it seems hardlylikely that after the war the Stock Exchange and the business of dealingin securities will ever be quite on the old basis again. 

In any attempt that is made to regulate them, however, it will be verynecessary to remember that capital is an extremely elusive thing, andthat if too strict rules are laid down for it, it very easily evadesthem by transferring itself to other centres. If the authorities decidethat only such and such issues are to be made, or such and suchsecurities are to be dealt in in London, they will be inviting those whoconsider such regulations unfair or unwise to buy a draft on Paris orNew York, and invest their money in a foreign centre. Capital is easilyscared, and is very difficult to bottle up and control, and if anyguidance of it in a certain direction is needed, the object wouldprobably be much more easily achieved by suggestion than by any attemptat hard and fast restriction, such as worked well enough under thestress of war. 

Any real improvement to be achieved in the system by which we havehitherto supplied other nations with capital will ultimately have to bebrought about by a keener appreciation, both by issuing houses andinvestors, of the kind of business that is truly legitimate andprofitable. It does not pay in the long run to supply young communitieswith opportunities for outrunning the constable, and it is possible thatwhen this wholesome platitude is more clearly grasped by the public, noissuing house will be found to bring out a loan that is not going to beused for some definite reproductive purpose, or to float a company, evenof the semi-speculative kind, the prospects of which have not been sowell tested that the shareholders are at least bound to have a fairchance of success. The ideals of the issuing houses have so far advancedsince the days of the Honduras scandal, that in the time of the late warin the Balkans none could be found to father any financial operation inLondon on behalf of any of the warring peoples. It only remains for theeducation of the investor to continue the progress that it has latelymade, for the waste of capital by bad investment to be greatlycurtailed. Probably there will always, as long as the present financialbasis of society lasts, be outbursts of speculation in which a greedypublic will rush madly after certain classes of stocks and shares, withthe result that a few cool-headed or lucky gamblers will be able tolive happily ever after as country gentlemen, and transmit comfortablefortunes to their descendants for all time. This is the debt thatsociety pays for its occasional lapses in finance, just as its lapses inmatters of taste are paid for by the enriching of those who provide itwith rubbishy stuff to read, or rubbishy shows in picture palaces. Theeducation of the individual in the matter of spending or investing hisor her money is one of the most pressing needs of the future, and onlyby its progress can the evils which are usually laid to the door offinance be cured by being attacked in their real home. In the meantimemuch might be done by more candid publicity and clearer statements inprospectuses of the objects for which money lent is to be used and ofthe terms on which loan issues have been arranged. Any reasonableattempts that may be made to improve the working of InternationalFinance are certain to have the support of the best elements in theCity. 

At the same time we may hope that as economic progress goes slowly aheadover the stepping stones of uncomfortable experience, borrowingcountries will see that it really pays them to pay their yearly billsout of yearly taxes, and that they are only hurting themselves when theymortgage their future revenue for loans, the spending of which is notgoing to help them to produce more goods and so raise more revenuewithout effort. War is the only possible excuse for asking foreignnations to find money for other than reproductive purposes. In time ofwar it can be justified, even as an individual can be justified fordrawing on his capital in order to pay for an operation that will savehis life. But in both cases it leaves both the nation and the individualpermanently poorer and with a continuous burden to meet in the shape ofinterest and sinking fund, until the loan has been redeemed. Loansraised at home have an essentially different effect. The interest onthem is raised from the taxpayers and paid back to the taxpayers, andthe nation, as a whole, is none the poorer. But when one nation borrowsfrom another it takes the loan in the form of goods or services, andunless these goods and services are used in such a way as to enrich itand help it to produce goods and services itself, it is bound to be aloser by the bargain; because it has to pay interest on the loan ingoods and services and to redeem the loan by the same process, and ifthe loan has not been used to increase its power of turning out goodsand services, it is inevitably in the same position as a spendthriftindividual who has pledged his income for an advance and spent it onriotous living. 

One of the great benefits that the present war is working is that it isteaching young countries to do without continual drafts of fresh capitalfrom the older ones. Instead of being able to finance themselves byfresh borrowing, they have had to close their capital accounts for thetime being, and develop themselves out of their own resources. It is avery useful experience for them, and is teaching them lessons that willstand them in good stead for some time to come. For the old countries, when the war is over, will have problems of their own to face at home, and will not be able at once to go back to the old system of placingmoney abroad, even if they should decide that the experiences of warhave raised no objections to their doing so with the old indiscriminatefreedom. 

It is easy, however, to exaggerate the effect of the war on our power tofinance other peoples. Pessimistic observers, with a pacifist turn ofmind, who regard all war as a hideous barbarism and refuse to see thatanything good can come out of it, are apt in these days to make ourflesh creep by telling us that war will inevitably leave Europe soexhausted and impoverished that its financial future is a prospect ofunmitigated gloom. They talk of the whole cost of the war as so muchdestruction of capital, and maintain that by this destruction we shallbe for some generations in a state of comparative destitution. Thesegloomy forecasts may be right, but I hope and believe that they will befound to have been nightmares, evolved by depressed and prejudicedimaginations. War destroys capital when and where actual destruction ofproperty takes place, as now in Belgium, Northern France, and otherscenes of actual warfare, and on the sea, where a large number ofships, though small in relation to the total tale of the merchant naviesof the world, have been sunk and destroyed. Destruction in this sensehas only been wrought, so far, in limited areas. In so far asagricultural land has been wasted, kindly nature, aided by industry andscience, will soon restore its productive power. In so far as factories, railways, houses and ships have been shattered, man's power to make, increased to a marvellous extent by modern mechanical skill, will repairthe damage with an ease and rapidity such as no previous age haswitnessed. 

In another sense it may be argued that war destroys capital in that itprevents its being accumulated, but this is a distortion of the meaningof the word destroy. If it had not been for the war, we in Englandshould have been saving our usual three to four hundred millions a yearand putting the money to productive uses, in so far as we did not lendit to spendthrift nations or throw it away on unprofitable ventures. Ifwe had invested it well, it would have made us and the rest of the worldricher. Instead of doing so we are spending our savings on war andconsequently we are not growing richer. But when the war is over ourmaterial productive power will be as great as ever, except for the smallnumber of our ships that have been sunk or the small amount of damagedone to us by enemy aircraft. Our railways and factories may be somewhatbehindhand in upkeep, but that will soon be made good, and against thatitem on the debit side, we may set the great new organization formunition works, part of which, we may hope, will be available forpeaceful production when the time for peace is ripe. 

It is a complete mistake to suppose that war can be carried on out ofaccumulated capital, which is thereby destroyed. All the things andservices needed for war have to be produced as the war goes on. Thewarring nations start with a stock of ships and guns and military andnaval stores, but the wastage of them can only be made good by theproduction of new stuff and new clothes and food for the soldiers andnew services rendered as the war goes on. This new production may bedone either by the warring powers or by neutrals, and if it is done byneutrals, the warring powers can pay for it out of capital by sellingtheir securities or by pledging their wealth. In so far as this is donethe warring powers impoverish themselves and the neutrals are enriched, but the world's capital as a whole is not impaired. If we sell ourPennsylvania Railroad bonds to Americans, and buy shells with theproceeds, we are thereby poorer and Americans are richer, but theearning power of the Pennsylvania Railroad is not altered. It may be, ifwe conduct the war wastefully, and refuse to meet its cost by our ownself-denial--going without things ourselves so that we can save, moneyto lend to the Government for the war--that we shall pledge our propertyand sell what of it we can sell to neutrals, to such an extent that weshall be seriously poorer at the end of it. At present[9] we are notselling and pledging our capital wealth any faster than we are lendingto our Allies; and if we pull ourselves up short, and exercise thenecessary self-denial, seeing that we must pay for the war in the longrun out of our own pockets, and that far the cheapest and cleanestpolicy is to do so now, and if the war does not last too long, there isno reason why it should impoverish us to an extent that will cripple usseriously. 

It is true that we shall have lost an appalling number of the best ofour manhood, and this is a loss that is irreparable in many of itsaspects. But from the purely material point of view we may set againstit the great increase in the productive power of those that are leftbehind, through the lessons that the war has taught us in using thestore of available energy that was idle among us before. We shall havelearnt to work as we never worked before, and we shall have learnt thatmany of the things on which we used to waste our money and energy wereunworthy of us at all times and especially at a time of national crisis. If we can only recognize that the national crisis will go on after thewar, and will go on until we have made this old country civilized in thereal sense of the word, that is, free from destitution and the vice anddirt and degradation and disease that go with it, then our power ofrecovery after the war will be illimitable, and we shall go forward toa new standard of wealth and national duty that will leave the dingyideals of the nineteenth century behind us like a bad dream. This mayseem somewhat irrelevant to the question of International Finance, butit is not so. We led the way in spreading our capital over the world, with little or no regard for the consequences of this policy on thecondition of our population at home. We have now, in the greatregeneration that this war has brought, and will bring in still greatermeasure, to show that we can still make and save capital faster thanever, by working harder and spending our money on improving ourheritage, instead of on frivolity and self-indulgence. Then we shallstill be free to lend money to borrowers who will use it well, and atthe same time have plenty to spare for wise use at home in clearing theblots off our civilization. 

FOOTNOTES:

[Footnote 9: Written on New Year's Eve, 1915. ]

INDEX

ACCEPTANCES, of banks and firms. 26, 36America, as international financier, 73; trade expansion of, helped by England, 85Armament firms and bad finance, 135, 136

BANK OF ENGLAND, position of, 31. 32; weekly return of, 33Banks, bills of exchange held by, 26 _seq_. ; functions of, 35 _seq_. ; money deposited with, 25 _seq_. ; specimen balance sheet of, 35Bearer securities, 54Bill-brokers, 37, 38Bills of exchange, meaning of, 26 _seq_. ; on London, popularity of, 29, 30; uses of, 39, 40Bonds, description of, 54Bowley, Dr. , on specialization, 156Brailsford, Mr. , on Egypt and finance, 99Brazil, financial embarrassments of. 71; funding scheme for, 72

CANADA lends to England, 73Capital, bad effects of export of, 164; difficulty of controlling, 166, 171; definition of, 4, 17; function of, 3 _seq_. ; how acquired, 16; plenty of, advantageous to workers, 19, 20; reward of, 2 _seq_. Charles II, dukedoms founded by. 14, 15China and international finance, 106Cobbett on national prosperity, 159Colonial investments, advantages possessed by, 166Companies' securities, classes of, 57; issue of, 55Coupons, description of, 54Crammond, Mr. , on financiers and peace, 93Cumulative, preference, 59; sinking fund, 52

DEBENTURE stocks, 57Discount, market rate of, 38

EGYPT and finance, 98 _seq_. 

"FENN on the Funds, " on diplomacy and finance, 106Finance and industry, 75, 76, 131; as peace-missionary, 90 _seq_. ; benefits of, 83 _seq_. ; defined, 1; dependent on industry, 28, 29, 40; effects of war on, 92, 93Foreign Office and finance, 105, _seq_. France, loan issuing in, 47Freights, effect of war on, 162

GEOGRAPHICAL distribution, investment by, 24, 25German finance and diplomacy, 107German industry helped by English finance, 85Governments, borrowing by, 43 _seq_. 

HONDURAS loans, Select Committee's report on, 116 _seq_. 

"INCOME, " Dr. Nearing on, 7Industry the foundation of finance, 28, 29Inherited wealth, 11 _seq_. Interest, the price of capital, 2, 3Interest claims, as article of export, 80, 81Issuing houses, responsibilities of, 137 _seq_. 

JEWS and finance, 111 _seq_. Journalism in the City, 49, 50

KINGLAKE on Egypt, 100; on Jews of Smyrna, 112

LIMITED liability, system of, 68Loans, issue of, 45 _seq_. London, strength of, in credit matters, 30

MEXICO, revolution and default in, 71Morocco crisis and financiers, 93Municipalities, borrowing by, 45

NEARING, DR. , on capital's reward, 7, 8New York as financial centre, 30

PHILIP II repudiates debts, 67Preference securities, 57, 59Profit, distinguished from interest, 56; the reward of capital, 2, 3Prospectuses, fuller statement desirable in, 173; terms of, 49 _seq_. , 51Public, the, the modern dispenser of wealth, 15 _seq_. 

REGISTERED stocks, 55Risk, inseparable from industry, 23

SINKING Fund, working of, 52Snowden, Mr. Philip, on finance and diplomacy, 90, 91South African War and finance, 102, 103Specialization, dangers and evils of, 153 _seq_. State, as saver of capital, 21Stock Exchange, as regulator of new issues, 169, 170; effect of war on, 95; securities dealt in on, 42 _seq_. Stock markets, fluctuations of, 61, 62; international relations of, 62

TRADE balance, 80, 81

UNDERWRITING of loans, 46, 48; risk involved by, 53

VENEZUELA and German diplomacy, 107

WAR, effects of, on finance, 92, 93; lessons taught by, 161 _seq_. , 175 _seq_. 

THE END